Starbucks Corporation (SBUX) stock has unusual call options activity today. SBUX stock has dropped over 13% from its recent peak of $107.21 and is now trading at $92.70 per share. Investors may believe that SBUX stock is undervalued, given its revenue growth, operating margins, and positive free cash flow (FCF).

This development can be seen in Barchart's Unusual Stock Options Activity Report today. It shows that over 8,600 call options have traded in the Feb. 9, 2024 expiration period for the $95.00 call strike price contract.

That price is just 2.48% over the closing price of $92.70 on Tuesday, Jan. 16, with just 23 days until expiration. Moreover, the volume is so large that it dwarfs the prior number of contracts outstanding by almost 30 times. That can be seen in the “O/I” column in the chart below.

The bottom line is that a good number of investors are willing to take advantage of the stock's recent weakness. They believe that the underlying value of SBUX stock is higher than today's price.

Starbucks Has Good Underlying Value

Last quarter the company produced an 11% YoY increase in revenue and its full-year sales ending Oct. 1, 2023 were up 8%. This was based on strong comp sales and a GAPP operating margin of 18.2%, up from 14.2% in the prior quarter.

More importantly, Starbucks is now generating strong free cash flow (FCF). For example, in the year ending Oct. 1, 2023, it generated $3.675 billion in FCF, which was significantly higher than the last two years.

This works out to a 10.2% FCF margin based on its $35.976 billion in full fiscal year sales. For the quarter ending Oct. 1, its free cash flow was $1.246 billion, based on figures from Seeking Alpha. That means its FCF margin rose to 13.3% based on its quarterly $9.377 billion in revenue.

As a result, using analysts' projections of $39.53 billion in revenue for the year ending Sept. 30, 2024, FCF could potentially rise to $5.26 billion this year (i.e., 13.3% x $39.53b). That is 43% higher than the $3.675 billion it made for the year ending Oct. 1, 2023.

In other words, the stock could be worth significantly more. For example, using a 4% FCF yield metric, which is the same as a 25 times multiple, SBUX could rise to a market cap of $131.5 billion (i.e., 25x $5.26b). That is 25% over today's market cap of $105.4 billion.

In other words, SBUX stock could rise 25% from here to a price of $114.45 per share.

This price target assumes there won't be a recession in 2024 and that the company's margins and comp sales continue apace as last year. This could become apparent once the company releases its fiscal Q1 results on Jan. 30. 

But it also shows why some investors believe that the Feb. 9 call options look severely undervalued right now.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.