If you have some appetite for risk, Dutch Bros is a no-brainer buy.
Dutch Bros (BROS 1.09%) has broken into the crowded coffee chain field and made a real name for itself. It stands out with its friendly culture and vibrant beverage names, and the market is taking notice. Dutch Bros stock is up 30% this year, but it still looks like a fabulous buy. Here are five reasons to add it to your buy list.
1. Customers love it
The success of any business starts with a great product. Dutch Bros’ beverages aren’t substantially different than those from Starbucks or any other coffee shop, but the company emphasizes its customer-oriented service and relaxed, friendly culture. Reviews cite its service, ambiance, convenience, and value as reasons they love it.
It has a high position in numerous coffee shop and restaurant chain rankings, despite its small size and the fact that it’s only in 17 of 50 U.S. states right now.
2. Tremendous expansion opportunities
Management believes it can take this concept across the U.S., and it’s already moved south and west from its Oregon origins. It has 876 stores as of the end of the first quarter, and plans to open up to 165 stores in 2024. It’ll probably enter some new states this year, like it does every year. It sees the opportunity to have about 4,000 stores over the next 10 to 15 years, and considering its popularity, that doesn’t look like any exaggeration.
Imagine for a moment that stock price is tied purely to store openings. While that’s not usually the case, if everything else is going well, that will play a huge part. Quadrupling store count could easily lead to a strong increase in its stock price.
3. Comparable growth is accelerating
It would be concerning if all of the revenue growth was coming from new stores. If older stores can’t generate higher interest and sales, that’s a red flag for the business.
This was happening for a short time when inflation hit hard and shoppers pulled back. But same-store sales growth, which for Dutch Bros includes all stores open for at least 15 months, is picking up again. It came in at 10% year over year in the first quarter, the highest rate since Q1 2021, which was right before high inflation roiled the economy.
That implies that this is likely to be closer to its standard under normal operating conditions. And considering that we’re not out of the woods yet and not in a booming economy, this bodes well for Dutch Bros’ chances to keep this up and even accelerate this metric.
4. The all-important bottom line
None of the above would be enough to sustain a business long term without profits. Dutch Bros isn’t quite yet sustainably profitable according to generally accepted accounting principles (GAAP) standards, but it’s getting a lot closer.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) continue to climb and increased 120% over last year to $52.5 million in Q1. Net income was $16.2 million after a $9.4 million loss last year.
Dutch Bros is still in its high-growth phase, with a 39% year-over-year increase in revenue in Q1, and scale is resulting in higher profits. That’s the kind of growth investors want to see.
5. The price is right
Dutch Bros stock trades at a price-to-sales ratio of 2.8, which is cheap for a growth stock. It also trades at a forward 1-year price-to-earnings ratio of 90, which is expensive.
The reason I’m focusing on the price-to-sales ratio is because net profits are still volatile, and they may continue in that direction for the near future. Dutch Bros reported a full-year profit in 2023, but that included some quarters of net losses. Until it’s sustainably profitable, any earnings-related ratios will be less reliable. A high-growth company like Dutch Bros deserves a premium, but it’s a bargain according to the sales-based ratio.
Dutch Bros is a growth stock, as such it comes with the risk usually associated with high-growth stocks, including unsteady profits. But that’s why the rewards can be so high. Every investor should assess their level of risk tolerance before buying a risky stock, but if you have some, Dutch Bros could deliver wild returns over time.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
