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The Danger Zone Pick: 11/19/12

Monday, November 19th, 2012

Check out my latest Danger Zone interview with Chuck Jaffe of MarketWatch.com.

Starbuck is in the DangerZone today.
Valuation is writing checked the business operations cannot cash.

SBUX bulls are blind to the competition SBUX faces on many fronts, one of the most important of which is MCD.

Current valuation of SBUX, (~$49/share), implies NOPAT growth of over 12% compounded annually for 10 years. That would put SBUX’s NOPAT at over $4.8 billion or 77% of MCD’s 2011 NOPAT. I find it nearly impossible to believe that SBUX will ever be over 3/4s the size of MCD. I find it absurd to buy the stock when it already implies that.

As I detailed in Time To Dig In To McDonalds (MCD), SBUX simply cannot compete with MCD’s low-cost and distribution advantages. yet, SBUX is priced as if it is going to be more successful than Burger King (BKW), Wendys (WEN) and all the other stores that have tried an failed to make a run at MCD.

Put simply, SBUX’s valuation is writing checks the business cannot cash.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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