Dutch Bros (NYSE: BROS) is one of the fastest-growing coffee chains in America. The drive-thru coffee chain was founded in 1994, it started to franchise its locations in 1999, and it went public in 2021. Its store count grew from 254 shops in 2015 to 950 in the third quarter of 2024, and it plans to keep expanding for the foreseeable future.
Its stock has nearly tripled from its IPO price of $23, but does it still have more upside potential? Let's review the main reasons to buy, sell, or hold Dutch Bros stock.
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Image source: Dutch Bros.
The reasons to buy and hold Dutch Bros stock
Dutch Bros' drive-thru stores are smaller and cheaper to open than traditional coffee shops. That simplicity allows it to quickly flood areas with new stores, which boosts its brand's visibility without pricey marketing campaigns.
That "fortressing" strategy helped Dutch Bros grow rapidly in the U.S. as market leaders like Starbucks (NASDAQ: SBUX) grappled with sluggish sales. If we look at its same-store sales (at its stores open for at least 15 months), total store count, and total revenue over the past four years, we'll see that its expansion strategy is sustainable.
|
Metric |
2021 |
2022 |
2023 |
9M 2024 |
|---|---|---|---|---|
|
Total store-count growth (YOY) |
22% |
24.7% |
23.8% |
19.6% |
|
Same-store sales growth (YOY) |
8.4% |
1% |
2.8% |
5.2% |
|
Total revenue growth (YOY) |
52.1% |
48.4% |
30.7% |
31.8% |
Data source: Dutch Bros. YOY = Year over year.
Unlike many other high-growth restaurant chains, Dutch Bros hasn't fallen into the trap of opening new stores to boost its reported revenue and offset the weaker performance of its older stores. Instead, it's still confidently opening new stores, its same-store sales are climbing, and its total revenue is growing by the high double digits. For 2024, the company expects its total revenue to grow 30% and its same-store sales to rise 4.25%.
Dutch Bros also isn't exposing itself to potential quality-control issues by franchising too many locations. It still generated 91% of its revenue from its company-owned stores in the first nine months of 2024. It plans to end the year with 150 new shop openings, and it aims to open 160 new shops in 2025 and even more locations in 2026. Over the next 10 to 15 years, it believes it can more than quadruple its store count to about 4,000 locations.
Lastly, it plans to roll out more food items, which currently account for only about 2% of its revenue. This could make it more like Starbucks, Dunkin, and other sit-down cafés.
Dutch Bros' expansion plans might seem costly, but its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and generally accepted accounting principles (GAAP) net profit margins expanded over the past four years.
|
Metric |
2021 |
2022 |
2023 |
9M 2024 |
|---|---|---|---|---|
|
Adjusted EBITDA margin |
16.5% |
12.3% |
16.6% |
19.3% |
|
Net profit margin (GAAP) |
(24.3%) |
(2.6%) |
1% |
6.4% |
Data source: Dutch Bros. 9M = First nine months of 2024.
For 2024, it expects its adjusted EBITDA margin to rise to a midpoint of 17.3%. Its margins improved as it scaled up its business and hiked its prices to counter inflation.
From 2024 to 2027, analysts expect Dutch Bros' revenue and adjusted EBITDA to grow at a compound annual growth rate of 24% and 28%, respectively. With an enterprise value of $8 billion, it looks reasonably valued at 5 times its projected 2025 sales and 30 times its adjusted EBITDA. So if you expect Dutch Bros to keep expanding, it could still be a great time to buy and hold its rising stock.
The reasons to sell or avoid Dutch Bros stock
Dutch Bros is growing rapidly, but it's increased its share count by 144% since its public debut to cover its stock-based compensation and secondary offerings. Moreover, its insiders sold more than three times as many shares as they bought over the past 12 months -- and that chilly insider sentiment might limit its upside potential.
Dutch Bros could also face tougher competition over the next few years. Similar drive-thru coffee chains like Scooters are also expanding rapidly, China's Luckin Coffee (OTC: LKNC.Y) is mulling an expansion into the U.S., and Starbucks could experience a surprising turnaround with a new star CEO at the helm.
As for its margins, soaring coffee bean costs and sticky inflation could ultimately limit Dutch Bros' pricing power. If its margins peak or decline as its same-store sales cool off, its stock could easily be cut in half before it becomes a bargain.
Is it the right time to buy, sell, or hold Dutch Bros stock?
Dutch Bros doesn't look like it will run out of steam anytime soon. Investors should certainly watch the macroeconomic and competitive headwinds, but it's still firing on all cylinders. So for now, it's smarter to buy and hold Dutch Bros stock than to sell or avoid it.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Luckin Coffee and 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.
