Starbucks is poised to surge 21% as its loyalty program drives further growth and fends off fast-growing competition, BofA says

• Starbucks stock could surge 21% as its loyalty rewards program helps defend it against growing competition, Bank of America said.
• The bank reinstated coverage of the coffee retailer with a "Buy" rating in a Monday note.
• "Starbucks Rewards has been a decade long tailwind, expanding Starbucks reach to new customers and increasing spend when it does," BofA said.
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Starbucks stock can continue to trend higher as the coffee retailer's loyalty rewards program helps drive growth and defend it from heightened competition, Bank of America said in a note on Monday.

The bank reinstated coverage of Starbucks with a "Buy" rating and set a $135 price target, representing potential upside of 21% from Friday's close.

Much of the upside in the stock will be driven by its growing earnings from US locations, according to the bank, which pointed to its scale advantages in the specialty coffee market. With nearly 9,000 locations in the US, it will be difficult for any new coffee entrants to compete with Starbucks, according to the note.

"Few concepts have been able to achieve any meaningful scale. The result is significant scale advantages and supra-competitive returns for those chains that have them," BofA said.

And adding to Starbucks' competitive moat is its loyalty rewards app, which has helped drive growth and fend off competition. "Starbucks Rewards has been a decade long tailwind, expanding Starbucks reach to new customers and increasing spend when it does," BofA said.

The bank said growth in the Starbucks app has been a leading indicator for the company's quarterly sales growth, and in the third quarter, "growth in Starbucks Rewards inflected sharply higher, boding well for underlying demand."

Despite the strong earnings in the US, headwinds in China - where Starbucks is rapidly opening new locations - are driving the current valuation in the stock. But China concerns appear overstated, as prior economic slowdowns in the country had less of an impact on Starbucks than its local competitors, BofA argued.

Starbucks stock is below its 5-, 10-, and 15-year valuation averages relative to the S&P 500, driven by fears of slowing growth in China, BofA highlighted. "We believe the historical [valuation] range remains relevant given that Starbucks' growth has consistently outpaced that of the broader market."

Shares of Starbucks traded up as much as 2% on Monday, and are up about 6% year-to-date.