If you’re kicking yourself for not getting in on the 48% rise in Starbucks Corporation (NASDAQ:SBUX) shares in 2015, I have some good news for you: an analyst at Nomura thinks SBUX stock could surge yet again.
Nomura analyst Mark Kallnowski just initiated coverage on Starbucks stock as a “Buy” with a $70.00 share price target. With the price of SBUX stock at $57.50 intraday on February 19, 2016, that implies a surge in the stock of 21%.
So how will Starbucks get to $70.00?
“To say that, we take nothing away from the leadership that Starbucks has shown in the digital arena,” Kallnowski noted. “It’s one thing to have an opportunity and it’s another thing to actually put in the hard work and smart work to harness that opportunity. Starbucks deserves credit for its year’s worth of investments in digital initiatives, which should continue to pay off for years to come, in our view.” (Source: “NomuraSees Stock Up 21% to $70,” Barron’s, February 19, 2016.)
What the heck is Kallnowski talking about?
Kallnowski is particularly optimistic about the Starbucks mobile order and pay system. It’s becoming a big deal for the company known for changing the way we consume coffee, rather than for its technology.
It’s not really obvious, but Starbucks has become a pioneer in digital innovation. The company was well ahead of its competitors when it introduced its Starbucks app a few years ago. The app came integrated with a mobile payment system and Starbucks customer loyalty rewards card. This was an innovative idea to build customer loyalty to help drive sales that other companies have just recently started to notice.
The app caught on with customers like wild fire and it has now become a major focus for the company. What Starbucks CEO Howard Schultz revealed in the latest earnings call last month will be enough to give investors a natural caffeine rush.
Customers that used Starbucks’ mobile app to pay for their coffee accounted for 21% of all U.S. transactions in the first quarter of 2016, with that number rising to 22% in December (Starbucks’ Q1 is from October to December). (Source: “Mobile means more bucks for Starbucks,” Mobile Strategies 360, January 26, 2016.) The company added that they saw further acceleration in January.
Now Starbucks is taking its app one step further with another innovative idea. The company recently rolled out its mobile order and pay system. Using the latest version of the Starbucks app, customers can now order their coffee before they get to the store. The idea is to not have customers wait impatiently in line, especially during peak hours.
In the latest quarter (the service was launched in September), Starbucks President and COO Kevin Johnson said that the company is now processing more than six million mobile order and pay transactions per month and there were about one million U.S. customers that used the service in December.
However, according to Johnson, “We have just scratched the surface.” (Source: “Starbucks mobile order-ahead program reaches 6M orders per month,” GeekWire, January 21, 2016.)
Why does all this matter?
The Starbucks mobile app is a customer loyalty–driver. With so much competition in the coffee industry, much of which offers lower-priced coffee, it’s imperative that Starbucks locks down as many customers as it can.
The Starbucks app has now made it so customers don’t have to pull out cash when buying something. According to Psychology Today, studies have shown that “credit cards can stimulate overspending” and that “it is less psychologically painful to swipe a credit card than to physically hand over cash.” Starbucks’ app offers the same benefit. (Source: “Why We Overspend With Credit,” Psychology Today, June 22, 2013.)
Starbucks’ mobile order and pay system makes stores more efficient and shortens lineups, since the customer is not ordering from an actual barista. The pay system has the ability to meet the needs of convenience and customization at any time of the day for the on-the-go customer who might not have otherwise had time to get a coffee.
The Bottom Line on SBUX Stock
The Starbucks app makes its customers more loyal and lets them spend money without physically being in the store. It also lets stores serve more customers, while reducing lineups.
However, most importantly, the app will be a significant growth driver for SBUX stock going forward.