Is It Too Late to Buy Dutch Bros Stock?

Dutch Bros (NYSE: BROS) has taken investors on a wild ride since its initial public offering (IPO) in September 2021. The American drive-thru coffee chain went public at $23, opened at $32.50, and hit a record high of $76.25 during the apex of the growth stock rally on Nov. 1, 2021.

But today, Dutch Bros trades at about $38. Its stock was cut in half as its growth cooled off and rising interest rates compressed its valuations. So is it too late to embrace this former market darling -- or does its pullback represent a great buying opportunity?

Image source: Dutch Bros.

How fast is Dutch Bros growing?

Dutch Bros was founded by two brothers of Dutch descent, Dane and Travis Boersma, in Grants Pass, Oregon, in 1992. It was initially just a single espresso machine on a pushcart, but it started expanding rapidly after it opened its first drive-thru location in 1994. That expansion accelerated after it started franchising its first locations in 1999.

Before Dutch Bros went public, it had already grown its footprint from 254 shops in seven states at the end of 2015 to 471 shops across 11 states at the end of June 2021. By the end of the first quarter of 2024, its total shop count had risen to 876 locations -- including 582 company-operated locations and 294 franchised locations.

Dutch Bros has consistently opened new shops while growing its same-shop sales (at its locations open for at least 15 months) and total revenue over the past three years.

Data source : Dutch Bros.

Dutch Bros' stable same-shop-sales growth should allay concerns that its "fortressing strategy" -- in which it floods a region with new locations to build brand awareness and reduce its marketing expenses -- isn't cannibalizing its existing shops yet. It also continued growing throughout 2022 as it raised its prices to cope with inflation.

For the full year, Dutch Bros expects its revenue to rise 24% to 26% as it opens 150 to 165 new shops and grows its same-shop sales by the low single digits. Therefore, most of the company's near-term growth will still be driven by new shop openings, but it expects its established shops to continue growing organically.

Is Dutch Bros' expansion sustainable?

Dutch Bros' margins slipped on an adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) and generally accepted accounting principles ( GAAP ) basis in 2022 as inflation drove up its labor and commodity costs. But over the past year, its margins expanded as inflation eased, it hiked its menu prices, trimmed its spending, and significantly reined in its stock-based compensation expenses.

Data source : Dutch Bros.

For the full year, it expects its adjusted EBITDA to rise 22% to 28% to between $185 million and $195 million, which would give it a midpoint adjusted EBITDA margin of about 16%. Analysts expect its net profit margin to more than triple to 3.5%.

Investors should take those estimates with a grain of salt, but they imply its rapid expansion is sustainable. It's also growing a lot faster than Starbucks , which is expected to report declining revenue and profits this year.

Is its stock undervalued relative to its growth potential?

With an enterprise value of $7 billion, Dutch Bros' stock looks reasonably valued for a growth stock at 6 times this year's sales and 34 times its adjusted EBITDA. However, it's also more than doubled its share count since its IPO through secondary offerings and its stock-based compensation expenses, and its high debt-to-equity ratio of 2 could make it an unappealing stock to own as long as interest rates stay elevated.

That said, Dutch Bros could still have plenty of room to grow. From 2023 to 2026, analysts expect its revenue to grow at a compound annual growth rate (CAGR) of 23% as its adjusted EBITDA increases at a CAGR of 25%. Assuming it matches those estimates and its valuations hold steady, its stock could rise nearly 50% by the beginning of 2026. Therefore, Dutch Bros' stock might remain volatile -- but I don't think it's too late to buy it as a long-term investment.

Leo Sun 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 .