Investors often seek growth opportunities outside the tech sector or the latest artificial intelligence (AI) trends. Dutch Bros (NYSE: BROS) offers one such alternative. However, despite its potential, the stock has been a disappointment for some investors in recent years, losing about 13% of its value since its initial public offering (IPO) in September 2021. With the stock trading well below $40 per share, some may view this as an opportune moment to invest. But is it? Here’s what potential investors should consider.
Dutch Bros is in Growth Mode
Dutch Bros stands out as a promising option for investors looking for growth potential in the restaurant sector. The company reported a 30% increase in revenue in the second quarter ending June 30, 2023. This growth was supported by a 4.1% rise in same-store sales, a solid performance given the current economic uncertainty.
A significant aspect of Dutch Bros’ growth strategy is expanding its physical presence. The company recently opened 30 new locations, bringing the total number of stores in the U.S. to 671. Dutch Bros has ambitious plans to increase this number to 4,000 locations over the next 10 to 15 years.
Typically, companies in aggressive expansion phases struggle to report profits. However, Dutch Bros is bucking this trend. The company’s net income jumped approximately 130%, from $9.7 million in Q2 2023 to $22.2 million in the latest quarter. This growth is supported by expenses rising at a slower pace than revenues, a positive indicator.
According to Wall Street consensus estimates, Dutch Bros is expected to grow its sales and earnings per share at compound annual rates of 22.3% and 25.3%, respectively, between 2023 and 2026. This robust outlook highlights the company’s strong growth potential.
Valuation and Quality
Despite its growth, Dutch Bros shares are currently trading 58% below their peak, reached during the last bullish market in late 2021. Investor sentiment has cooled significantly since then, but the stock remains expensive, with a price-to-earnings ratio of 127.
For some investors, this high valuation may not be a concern. Bulls believe Dutch Bros can achieve its goal of 4,000 stores. These optimistic investors are the ones who should consider buying the stock, as the current valuation assumes this favorable outcome is likely. If Dutch Bros reaches its target, its revenue and earnings will be significantly higher than they are today.
However, caution is warranted. Dutch Bros still has much to prove before it can be considered a solid investment. One major concern is the lack of an economic moat. Despite its recent challenges, Starbucks remains the dominant player in the industry, with strong brand recognition and cost advantages developed over decades.
Dutch Bros, in comparison, lacks the long-standing relevance and competitive strengths of Starbucks. With a U.S. store base about 25 times smaller than Starbucks, Dutch Bros has a long way to go before it can compete on the same level.
Investor Caution: The Risks of Growth Stories
Investors are often drawn to compelling growth stories, but it’s important to remember that strong growth doesn’t last forever. Dutch Bros could face significant downside if its growth slows, which is a real possibility given the highly competitive retail coffee industry. This sector has low barriers to entry and no switching costs, making it difficult for any one company to maintain a dominant position.
Even with the stock trading below $40 per share, it may be wise for investors to stay cautious and consider other opportunities. The potential risks and high valuation suggest that Dutch Bros might not be the best choice for those looking for a stable, long-term investment.
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