A downturn and inflation could pose a threat to some stocks, but there are some that seem safe to hold onto. Starbucks does not seem to be one of those stocks. Since the beginning of the year, it has fallen 27%, making it a less attractive investment than the S&P 500, which is down just 13%.

Despite the business’s recent difficulties, it wouldn’t be surprising if they got worse.

What’s this in my coffee?

Starbucks reported its Q3 earnings earlier this month; sales increased by 9% to $8.2 billion year over year. Global comparable-store sales rose 3%, but that was mainly due to higher average transactions (up 6% while comparable transactions declined by 3%).

Since October, Starbucks has raised its prices multiple times due to rising inflation.

Comparable transactions rose by 3%, and sales grew by 15% a quarter earlier. Even though China’s comparative numbers in Q3 were down significantly due to lockdowns (sales declined 44% compared with last quarter), Starbucks’ comparable transactions were still up just 1% this quarter compared with 5% last quarter.

It might be acceptable for investors if the company’s costs were tightening, but that’s not the case. Operating expenses increased by 13% last quarter, but revenue only increased by 9%. As a result, Starbucks’ net earnings dropped 21% to $912.9 million.

Due to inflation and unionization, the company’s supply costs could rise. The first Starbucks store in the chain to unionize was in Buffalo, New York, in December. More than 200 stores have voted on it since then.

This year, Starbucks stock has declined in value, but it still trades at 25 times its future earnings. For the average S&P 500 stock, investors are paying 18 times future profits. High multiples can be justified for businesses that are growing at high rates, but Starbucks is not one of those companies these days. Both stalling revenue growth and rising costs could adversely affect its profits.

Hmm, you know what, the smaller one

Starbucks’ brand strength is being tested right now. Slowing sales growth could indicate consumers aren’t taking the price hikes well if the numbers continue to decline.

Starbucks isn’t going to be able to keep prices high and ensure that sales don’t decline with record inflation numbers in the economy right now.

As a result of Starbucks’ high valuation, this growth stock looks too risky to hold.