Whenever it looks like a company is too huge to be challenged, there will always be a smart entrepreneur who will find the niches that aren't being met and crack them open. That's what's been happening with coffee chain Dutch Bros (NYSE: BROS) . It can't really compete with giant Starbucks , but instead, it's found a way to connect with its customers with its own culture and set of rules, and it's taking off.
Investors had high hopes for Dutch Bros when it went public in 2021 at a time of unprecedented initial public offering (IPO) activity and wild investor sentiment. That bull market popped, and many hot stocks have dropped into bargain territory. Here's why you might want to add Dutch Bros stock to your buy list.
Not trying to compete
Dutch Bros isn't trying to become the next Starbucks. It's actually been around for 30 years as a small chain, and over that time, it's developed a distinct identity with a focus on friendly "broistas" and a chill, fun atmosphere. However, along with that, it's serious about speed and customer service, and broistas often walk through the drive-thru lanes taking orders (with a smile). It's also cheaper than Starbucks.
It may be the work of a small-time entrepreneur, but it's already expanded to more than 800 stores in 17 states. Much of that growth has happened recently, since the company decided to expand the chain and go public. The founder-CEO has stepped down to make way for a serious executive team to lead it forward as it keeps growing.
And growing it is. Revenue increased 39% in the 2024 first quarter. Even better, the company's same-store sales have made a comeback after undergoing pressure last year and were up 10% year over year in the first quarter.
Where is Dutch Bros heading? Management is aiming for 4,000 stores over the next 10 to 15 years. If it can continue to grow at its current pace, it should be able to scale efficiently and profitably. It may not become the next Starbucks, but it could be a stellar stock to own if it can achieve this. That's why restaurant stocks at this early growth stage look so enticing; if you get in on the ground level, you're likely to head up high. But it also comes with risk, since any stock at an early stage still must prove its long-term value.
So far, Dutch Bros' trajectory looks strong. I say that partially anecdotally, having spoken to customers who really like the company's coffee. It's building the brand, and there's no reason it shouldn't be able to open new stores in new areas. Its new, seasoned executive team is developing a plan to bring out new stores all over the country without overspending.
It's already bearing fruit. Dutch Bros opened 165 stores last year and another 45 in the first quarter. Adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) increased 120% year over year in the quarter with a 7-point increase in adjusted EBITDA margin, and adjusted selling, general, and administrative (SG&A) expense fell to 14.7% of revenue, or below 15% for the first time since its IPO. That's strong scaling.
Dutch Bros could be a bargain buy
Dutch Bros stock trades at 2.6 times trailing-12-month sales and 85 times forward one-year earnings. Since it's not reliably profitable -- yet -- any earnings-related valuation is tricky. But on a sales basis, Dutch Bros stock looks quite cheap.
The stock is up 25% this year, modestly outperforming the broader market, although it fell recently on analyst expectations for restaurant sales to fall over the summer. Will that affect Dutch Bros? It might, but it may also mean more people switch to cheaper coffee from the same store, and that could work in its favor.
Dutch Bros has a massive growth runway, and it's just getting started. Management is inspiring confidence that it can take the company far, and it could be an excellent growth candidate for your portfolio as long as you have a bit of an appetite for risk.
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 .
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