A Coffee at Starbucks Will Be Sweeter for Google

Ranu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Starbucks (NASDAQ: SBUX) has always remained a jewel for investors. Recently, it announced robust third quarter earnings for fiscal year 2013, the best performance in its 42-year history. Starbucks reported net revenue of $3.7 billion, an increase of 13% over last year. It recorded growth in Starbucks store sales across all the regions, opening 341 new stores in the quarter. EPS grew 28% over the same period last year to $0.55 per share, the second highest increase ever in the company’s history. Additionally, its profit increased 25% thanks to same-store sales, which rose 8% globally and 9% in the US. Apart from the financials of last quarter, the following points also indicate that the growth of the company is far from over.

Google in, AT&T out

A sip at Starbucks will now taste sweeter for Google (NASDAQ: GOOG), but not for AT&T (NYSE: T). To further enhance its in-store services, Starbucks recently signed a significant deal with Google and Level 3 Communications, to replace AT&T as the provider of Wi-Fi service at thousands of U.S. Starbucks locations. The new Wi-Fi service is 10 times faster than what AT&T offered. This will lure more customers, considering that many customers visit Starbucks not just to enjoy their favorite drinks, but also to use the free wireless internet for work, study, or play.

The deal will provide service to around 7,000 Starbucks stores across the U.S. It means that AT&T is expected to lose 7,000 wireless subscribers, whereas Google can expect an addition of 7,000 new subscribers within the 18-month rollout period starting in August. AT&T currently provides 1.5 Mbps Wi-Fi speeds at Starbucks shops, but the new Wi-Fi speed will be comparable to 4G LTE mobile broadband services, which averages between 5 Mbps to 10 Mbps. 

AT&T has good business relations with Starbucks, and markets its 4G LTE network as the most reliable and the fastest in the country. In its second quarter, AT&T delivered robust earnings. It added more than 2 million new wireline and wireless high-speed broadband connections. Total wireless revenue was up 5.7% year over year to $17.3 billion. It reported 551,000 wireless postpaid net additions, the best second quarter postpaid figure in four years. It also added about 1.2 million new smartphone subscribers. Its U-verse service now represents 51% of wireline consumer revenue, up from 41% in the same quarter last year.

Meanwhile, this is a smart move for Google. The deal will allow Google Fiber-equipped cities to enjoy 100-times faster download speeds in their local Starbucks compared to the current internet speed. It will act as a start-up for the expected long-term partnership between Google and Starbucks in the development of the next-generation Starbucks Digital Network. The duo currently provides access to news and entertainment from sources like the Wall Street Journal, Apple’s iTunes, USA Today, ESPN, Yahoo! Entertainment, Starbucks’ own entertainment arm, etc.

In addition, Google’s Android platform looks strong. It partnered with Netflix to improve the resolution of video streaming quality on Android 4.3., which will support the launch of the new Nexus 7 as well. To further accelerate its Android platform, Google is expecting more than 70 million Android tablet activations by the end of 2013, in comparison to the 10 million tablet activations it achieved during fiscal year 2012. The amazing performance of Google Play Store, with 1 million apps and 50 billion downloads, will support the company in achieving this expectation. 

For tea lovers

Millions of people drink coffee, but for those who like tea, Starbucks is still a good choice. To expand its tea business, Starbucks acquired Teavana Holdings, a specialty tea retailer, for around $620 million in late 2012. This makes the 300-unit Teavana retail chain a wholly owned subsidiary of Starbucks.

Moreover, Starbucks now has an opportunity to create a unique retail experience in the $40 billion tea category. It will add tea bars to Teavana stores that will serve handcrafted beverages. The acquisition complements Starbucks’ already existing core tea business, Tazo tea, which it sells in stores as well as across grocery retailers. Furthermore, Starbucks plans to create a two-tiered business, where both the Tazo and Teavana branded products will co-exist.

International expansion 

To expand its coffee business in international markets, Starbucks announced plans to open 100 new coffee shops in the Philippines, Indonesia, and Malaysia in the coming three to four years. Starbucks also has significant potential in China. This year, Starbucks spent $1.2 billion for coffee shops in China, capitalizing on the Chinese people’s affinity towards coffee and their favorite beverage, tea. Currently, there are around 700 stores in China. By 2014, Starbucks anticipates China to be its second largest market outside the U.S. It is planning to open a total of 1500 stores in more than 70 Chinese cities by 2015. 

Investors’ take 

The future of Google and Starbucks looks more impressive due to the new strategic alliance. Google will also benefit from its accelerating Android platform. Both these companies have reported strong financial earnings in their recent quarters. With continued international expansion and an expanding tea business, Starbucks is strong bait for your portfolio.

Its share price has doubled over the last 12 months. Seeing this, analysts expect Starbucks will increase revenue by 12% in the next two years. I recommend buying both Starbucks and Google for long-term growth.

Although AT&T has shown strong earnings in its second quarter, the new deal between Google and Starbucks will result in a heavy loss of customers and potential revenue for AT&T. As a result, I recommend holding this stock.

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Ranu Devi has no position in any stocks mentioned. The Motley Fool recommends Google and Starbucks. The Motley Fool owns shares of Google and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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