Just like the caffeinated beverages that it sells, Dutch Bros (NYSE: BROS) has done a great job energizing investor portfolios. Since the start of November, shares of the coffeehouse chain have surged 57%, driven by renewed market optimism.
This consumer discretionary stock has taken a tiny breather recently. And it currently trades 31% below its all-time high from November 2021. If you're looking to buy the dip, you need to know these three things about Dutch Bros.
1. Growth
In the three-month period that ended Sept. 30, Dutch Bros posted a 28% year-over-year revenue jump. That was partly supported by same-store sales rising 2.7%. But it was mostly attributed to the business opening 38 net new stores during the quarter, with plans to end 2024 having opened 150 locations in the 12-month time frame.
Expanding the physical footprint is the key growth strategy for Dutch Bros. The company operates 950 stores today, more than double from the end of 2020. However, the executive team has explicitly set a target of having 4,000 locations open in the next 10 to 15 years. That would translate to a more than fourfold increase in the store count.
Each location generates on average $2 million in annual sales volume. Moreover, they reported a contribution margin, which measures operating profitability of each location, of nearly 30% in the third quarter. It makes sense why executives want to grow rapidly.
2. Moat
If investors want to own businesses for many years, it's critical to find companies with economic moats. Businesses with durable competitive advantages have the ability to defend their turf against industry rivals and new entrants. This is the sign of a high-quality company.
With Q3 total revenue of $338 million and less than 1,000 locations, Dutch Bros is tiny in the overall restaurant sector. I'd make the argument that the business has not developed a moat, at least not yet.
In this industry, successful restaurant chains have a strong brand presence. Direct rival Starbucks, which has been around for over 50 years, has almost 17,000 stores just in the U.S. and has developed a top-notch digital platform. Plus, it has cost advantages, which can also be a key component of a restaurant's moat.
Yes, Dutch Bros is growing rapidly. But can an investor confidently say this company has competitive strengths when compared to Starbucks? I don't believe so, as the latter has a globally recognized brand with tremendous scale benefits.
Dutch Bros could develop an economic moat over time. But it's not there yet, and that adds risk to the investment thesis.
3. Valuation
After the stock's huge rise in the past few weeks, it still trades 31% below its all-time high. But investors seem very optimistic about the company, especially after its latest financial update.
Consequently, the valuation has gotten even more stretched. Shares can be purchased at a forward price-to-earnings (P/E) ratio of 116. This bakes in the belief that Dutch Bros will flawlessly execute its growth strategy and get to 4,000 stores within management's time frame, which hopefully results in a quickly rising profit base. It's difficult to invest in these kinds of situations, given the amount of uncertainty looking ahead.
To be fair, though, the company is still in the early innings of its trajectory, so another valuation multiple could be useful. On a price-to-sales (P/S) basis, the stock trades at a 32% premium to Starbucks. Some investors might find this ratio more reasonable than the forward P/E multiple.
However, I think Dutch Bros' ultimate success is not a foregone conclusion, so I can't recommend buying shares.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $348,112!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $46,992!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $495,539!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of December 16, 2024
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
