Why Rising Coffee Prices and Falling Profits Make Starbucks Stock a Strong Sell

Starbucks (SBUX) is facing a challenging future. Rising coffee prices, shrinking profits, and high debt are making the stock look like a risky bet for investors.

Coffee prices have been climbing steadily for years, but recent increases are raising red flags. From 2021 to 2024, coffee prices surged by 65%, a sharp rise when compared to historical trends. This increase is primarily driven by climate change. Droughts and rising temperatures are significantly impacting coffee production in key growing regions. While coffee prices have always fluctuated, climate change is creating conditions that may keep prices higher for the long term. This will put pressure on Starbucks, as their profit margins shrink due to rising raw material costs.

Starbucks has been struggling with lower profitability. Over the past five years, the company’s profit margin dropped from 14.45% in 2020 to 9.73% in 2024. This 32.66% decline reflects how rising costs and other challenges are affecting their bottom line. Meanwhile, their cash flow from operations (free cash flow, or FCF) has been dropping by over 5% annually. This is concerning, as Starbucks depends on that cash for dividends, debt repayment, and growth investments.

Even though Starbucks’ revenue has grown, stock prices have outpaced that growth. Between 2020 and 2024, revenue increased by 24.4%, but the stock price rose by 44%. This disconnect indicates that Starbucks is likely overvalued. With profits shrinking, this gap is expected to widen further. Starbucks is paying out more in dividends than it can afford. The company’s free cash flow payout ratio has been gradually increasing, reaching 90.37% in 2024. This means most of the company’s cash is being used for dividends instead of paying down debt or investing in growth. Speaking of debt, Starbucks has negative equity — its liabilities exceed its assets by $7.44 billion. This financial strain puts the company in a precarious position.

When calculating Starbucks’ intrinsic value using four valuation models, the results show a clear overvaluation. The average intrinsic value across models is $62.06 that is lower than the current stock price of $97.73. This suggests that Starbucks is likely due for a price correction in the near future.

Bottom Line for Starbucks

Given Starbucks’ declining profitability, rising coffee costs, high debt, and unsustainable dividend payouts, the stock is a strong sell. While the company is still generating revenue, its financial health is weakening. Expect the stock to face a significant decline as these issues compound over time.