Where Will Dutch Bros Stock Be in 5 Years?

It can be tempting to jump on the chance to buy a hip new stock as soon as it hits public markets. But with shares down around 40% since its initial public offering (IPO), Dutch Bros (NYSE: BROS) is an example of why it can pay to be more patient. Let's dig deeper to see if this innovative coffee chain can recover over the next half-decade and beyond.

What is Dutch Bros?

Although many Americans have just recently become familiar with it, Dutch Bros is far from a new company. The convenience-focused drive-thru coffee chain was founded in 1992 in Oregon before slowly spreading across the Western United States. After going public , its expansion plans have accelerated as it seeks to compete against established rivals like Starbucks , Dunkin' Brands , and Restaurant Brands International 's Tim Hortons .

Although it may look simple, the coffee industry is not for the weak-hearted. Some experts estimate that 62% of independent shops fail in their first five years of operation. And Dutch Bros' journey from its humble beginnings into a semi-national chain (with 912 locations across 18 states) says a lot about its value proposition to consumers.

Unlike Starbucks, which presents as a cozy third space where people can get work done, Dutch Bros focuses on speed and convenience. Its locations are drive-thru only. But it has balanced this around bubbly and friendly staff trained to personalize the customer experience.

But perhaps most importantly, Dutch Bros isn't targeted toward coffee snobs. Its menu boasts a wide array of drinks, ranging from sugary energy drinks to boba tea, milkshakes, and smoothies , making it ideal for consumers who enjoy unique flavor combinations.

Why is the stock underperforming?

Dutch Bros' second-quarter revenue grew 30% year over year to $324.9 million, driven by 36 new shop openings (to 912) and modest same-shop sales growth. Operating income jumped 64% to $32.2 million. The company enjoys significant interest in its rewards program, which allows consumers to get free drinks by making qualified purchases.

Members represented a whopping 67% of all transactions in the period, suggesting this is shaping up to be a key driver of loyalty and retention.

Image source: Getty Images.

But while Dutch Bros seems to have all the ingredients for sustainable success, that hasn't necessarily made its public stock a good investment. The biggest problem seems to be overvaluation. Despite falling significantly from its all-time high of $76, in my view, the market is still pricing the shares at a premium, with a forward price-to-earnings (P/E) multiple of 75.

For context, the S&P 500 index trades at a forward estimate of just 23 while comparable stocks like Starbucks or Luckin Coffee trade for forward P/Es of 24 and 18, respectively. And while it is normal for growth-oriented companies to trade at premiums, Dutch Bros' current results don't seem to justify its stock's inflated price tag.

What could the next five years have in store?

While Dutch Bros looks overpriced based on projected 12-month earnings, that could change over the coming years. Unlike comparable coffee chains, Dutch Bros is still relatively tiny. And the company could unlock a vast addressable market by rolling out its proven strategy across the U.S. and, eventually, the rest of the world. Investors can cut this pricey stock some slack because of its clear, untapped potential.

Will Ebiefung has positions in Luckin Coffee. The Motley Fool has positions in and recommends Luckin Coffee and Starbucks. The Motley Fool recommends Dutch Bros and Restaurant Brands International. The Motley Fool has a disclosure policy .