3 Stocks With Starbucks-Like Return Potential
Coffee giant Starbucks (NASDAQ: SBUX) is an incredible success story. Former CEO Howard Schultz grew the chain from a few stores in Seattle in the early 1980s to nearly 25,000 locations today, creating a company valued at more than $75 billion, with annual revenue of $22 billion and annual net income approaching $3 billion. Starbucks stock has proven to be a blockbuster investment, soaring nearly 16,000% since the company went public, in 1992, and gaining about 280% over the past decade.
It's impossible to predict which companies will produce similar returns in the future, but buying and holding shares of good companies that have a lot of potential is a reasonable strategy. We asked three of our Foolish investors to each describe a stock that could provide investors with Starbucks-like returns. Here's why they chose Chipotle Mexican Grill (NYSE: CMG), AU Optronics (NYSE: AUO), and Take-Two Interactive (NASDAQ: TTWO).
A string of mistakes
Tim Green (Chipotle Mexican Grill): I'm no fan of Chipotle stock. Following the food safety crisis of 2015, shares of the fast-casual chain tumbled, going from absurdly overpriced to substantially overpriced, in my opinion. The stock started to recover this year, but a new norovirus outbreak and reports of mice in a Dallas restaurant have sent shares plunging anew. Even after slumping more than 50% from its all-time high, Chipotle stock still trades for around 22 times its peak earnings, reached in 2015, and 33 times the company's best-case scenario 2017 earnings guidance of $10 per share.
The task of Chipotle rebuilding its image has been made more difficult by these recent issues, and a full recovery to pre-crisis levels of sales and profitability is probably going to take a long time. However, Chipotle's long-term growth potential hasn't really changed. There's still room in the U.S. for more locations, and international markets remain almost entirely untapped. The company needs to stop having these biannual food safety shocks for any of that to matter, but there's still a chance that Chipotle can grow into a global behemoth, like McDonald's or Starbucks. Both of those companies are worth many times more than Chipotle.
There's no guarantee that Chipotle will ever fully recover, and there's no guarantee that the company won't hit a wall before even coming close to being the next Starbucks in terms of global scale. But the potential is there, and long-term investors willing to pay a high price and accept plenty of uncertainty can go along for the ride.
Now appearing on the small screen
Rich Duprey (AU Optronics): The flat-panel display industry can be cyclical, and AU Optronics does generate almost half of its revenue from the television market, but the LCD and OLED screen manufacturer should still be worth considering as a value stock.
In addition to TV screens, AU Optronics realizes a sizable amount of sales from notebook and tablet displays (17%); commercial displays for cars, ATMs, and point-of-sale systems (16%); and monitors for laptops and desktop PC systems (14%). It also makes screens for mobile devices, though to a lesser extent -- which is unfortunate, because that market is heading into a "super cycle."
AU Optronics trades at less than $4 per share and only five times trailing-12-month earnings, but it's not a fly-by-night operation. Rather, the screen maker operates a high-quality business that was hurt buy some rocky performance last year. But sales surged 24.5% last quarter, and analysts expect the company to grow earnings at a compounded rate of more than 65% annually for the next five years. The stock also is selling at low sales, book value, and cash flow multiples.
It's not too often you find a business that has the reputation and solid growth prospects that AU Optronics does, while also carrying an incredibly low share price. The TV upgrade cycle may ebb and flow over time, but the trend is largely upward. And while the stock's $0.19-per-share dividend may be nothing to write home about, the annual yield is 4.8%, giving investors yet another reason to consider adding this stock to their portfolio.
All fun and games
Danny Vena (Take-Two): There's no doubt about it: Starbucks has been a great long-term investment. But looking back over the last five years, Take-Two has consistently outperformed the coffee giant. While Starbucks has more than doubled in the last five years, Take-Two has gained over 800%, and is poised to provide multibagger returns going forward.
Best known for its Grand Theft Auto franchise, Take-Two has been expanding its portfolio beyond its flagship franchise, with successful additions such as Red Dead Redemption, BioShock, and NBA 2K17, which has been among the top 10 best-selling games since its release last year. Take-Two acquired Spain's Social Point mobile-gaming studio and its profitable free-to-play titles Dragon City and Monster Legends.
Expanding its library of games isn't the only potential catalyst for the company. Take-Two has partnered with the National Basketball Association to form the NBA 2K esports league, based on the best-selling video game. This professional competitive gaming league will debut in 2018, with 17 NBA teams participating in its inaugural season. The esports market, which generates revenue from media rights, advertising, sponsorship, ticket sales, and game-publisher fees, is projected to reach nearly $700 million this year and $1.5 billion by 2020.
Take-Two's biggest opportunity may come from recurrent consumer spending. In the company's just-completed quarter, existing customer spending on microtransactions, virtual currency, and downloadable add-on content grew 71% year over year to 40% of total sales and helped expand gross margin to 53%, up from 38% in the prior-year quarter.
That's Venti-sized growth!
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Danny Vena owns shares of Chipotle Mexican Grill, Starbucks, and Take-Two Interactive Software. Danny Vena has the following options: short January 2018 $560 calls on Chipotle Mexican Grill, long January 2018 $530 calls on Chipotle Mexican Grill, short January 2018 $520 calls on Chipotle Mexican Grill, and long January 2018 $470 calls on Chipotle Mexican Grill. Rich Duprey has no position in any stocks mentioned. Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Starbucks, and Take-Two Interactive Software. The Motley Fool has a disclosure policy.