After last year’s growth of 70%, the idea of taking a stake in Dutch Bros(NYSE: BROS) stocks can be a bit scary right now. After all, there are limits to how much a stock can climb in a fairly short period of time.
However, this is one of those cases where investors may be better off focusing on where this company is going rather than where its stock has been. There’s likely plenty of long-term upside to come, even if the analyst community says the stock is almost entirely overpriced in the short term.
Among others, four specific reasons for using the rally break from the end of November as an entry point stand out.
Dutch Bros is a chain of coffee shops that do business with a car. At last count, it has 950 stores, most of them on the West Coast and in the Southwest quarter of the United States. However, it is steadily making its way to the east.
Technically it competes with a powerhouse Starbucks(NASDAQ: SBUX)although that doesn’t appear to be a real threat given Starbucks’ 16,941 US locations. The average Starbucks store is also much larger, offering customers a place to sit and enjoy their food along with their coffee and other premium beverages. Dutch Bros locations are only drive passage.
However, don’t let the smaller size fool you. Dutch Bros is different in ways it attracts customers, including in ways that appeal to some of Starbucks’ regulars.
Chief among these differences is the typical interaction of employees with customers. While Starbucks has spent the past few decades providing a very formal and unique experience in each of its stores, Dutch Bros customers are more likely to have an informal and personal conversation with employees. It is also not uncommon for each local community to publicly request support for a local community-based cause, including fellow employees in need.
Dutch Bros competes with Starbucks and other coffee retailers, including McDonald’sby being something completely different from any other.
However, simply being different does not reward investors. What makes this stock such a popular investment prospect here and now?
These four things, mostly.
In the three months ended September, Dutch Bros’ top line of $338 million was up 28% from last year. Most of this sales growth came from the opening of new stores (38 in total), although same store sales improved by a respectable 2.7% compared to a comparison of 4% for the same quarter last year.
One strong quarter doesn’t make a trend, but this level of sales growth isn’t a one-off. This pace of revenue growth has been present since at least September 2021, when the company went public and began reporting its fiscal results.
Moreover, the analyst community calls for comparable top-line growth at least until 2026.
There is every reason to believe that Dutch Bros will be able to meet the high expectations of analysts for the near and not so near future.
While the 950 stores are significantly more than the 800 that were open two years ago — and far more than the 328 stores that opened seven years ago — this number still only scratches the surface of what lies ahead. Enterprise longer term goal is to build 4,000 stores.
That four-fold expansion is possible even without forcing a head-on confrontation with bigger, deeper-pocketed rivals like McDonald’s and Starbucks. Dutch Bros’ relatively smaller size could actually be seen as an advantage, as it allows the company to more easily maintain its casual, personal relationships with its customers by doing the same with its employees.
Perhaps the most impressive aspect of Dutch Bros’ business and growth is that, unlike many other companies of its size and type, it is profitable, and increasingly so. Its 2023 bottom line of $0.30 per share is expected to reach $0.45 in 2024, en route to earnings of $0.55 per share in 2025.
Data source: StockAnalysis.com. Chart by author.
The scale obviously helps. While operating multiple stores means the company has to spend more on variable costs such as inventory and wages, fixed costs such as corporate overhead and marketing are — goodfixed — leaving more money behind to trickle down to the bottom line. Larger size also means that a company has a greater negotiating advantage when dealing with suppliers and service providers.
Finally — and perhaps most importantly — as odd as the less polished, informal customer experience may seem compared to what most consumer-facing companies have been trying to offer since the 1980s, Dutch Bros’ way of connecting with its customers is what people want.
Such shifts in cultural preferences are not unheard of. They’re quite normal, actually.
For example, during the 1970s, shoppers abandoned downtown department stores for malls that were more likely to be located in nearby neighborhoods. Soon after, there was a sweeping shift from local ownership of restaurants to chains. Trucks used to be owned only by people who needed them for work. Now they drive like limousines. Brand loyalty is also reversed by smart shopping and a willingness to try alternatives.
In other words, change is norm. Tired of the old, people always seem to want something else.
In the case of Dutch Bros, the fundamental shift is rooted in a growing preference for authenticity and a growing distaste for questionably dominant names in the industry. Figures from market researcher Oberlo show that 88% of consumers say authenticity plays an important role in purchasing a brand. Almost half of consumers say they are willing to pay more to buy from brands they trust.
It would be naive to ignore the role played by convenience. Dutch Bros locations are built and operated only to accommodate drive-in customers, allowing for a quick experience that the competition can’t always offer.
None of this guarantees that Dutch Bros stock will not suffer some sort of setback at some point in the foreseeable future. Indeed, if this stock’s historical volatility is any indication, investors can count on an unpleasant change to take shape sooner or later.
Just keep the bigger picture in mind if and when that happens. The underlying growth story here is incredibly bullish, even if it will take years to fully play out. It’s certainly worth the wait, and worth the likely ebb and flow in the meantime.
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James Brumley has no position in any of the listed stocks. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has disclosure policy.
