The emerging coffeehouse chain, Dutch Bros, has provided shareholders with a volatile experience. Amidst the current focus on large tech stocks, especially those involved in artificial intelligence, investors may be exploring opportunities in less highlighted companies. Dutch Bros, a mid-cap stock valued at $5.4 billion, presents a possible investment opportunity.
Currently, Dutch Bros’ stock is trading at a 54% discount from its peak price, though it has risen by 40% over the past year. The question remains as to whether Dutch Bros can outperform the S&P 500 by 2030.
Dutch Bros, primarily operating drive-through coffeehouses across the United States, is recognized for its significant growth potential. As of June 30, the company boasted 912 locations, an increase of 21% compared to the previous year. Most of these are company-operated, with about one-third being franchised. The management aims to expand to 4,000 stores within the next 10 to 15 years, signifying a potential 339% growth in their current footprint by 2034 or 2039. Achieving this target would likely result in a considerable increase in revenue.
Aside from opening new locations to boost sales, Dutch Bros is also experiencing growth in same-store sales, advancing by 4.1% in the latest quarter, which surpasses that of its larger rival, Starbucks. Financially, Dutch Bros has achieved profitability, with its net income more than doubling year-over-year to over $22 million in the second quarter. As the company continues to expand, it is expected to better utilize its resources, enhancing profitability.
Despite these promising aspects, there are concerns regarding Dutch Bros’ capacity to outperform the S&P 500 by the end of the decade. The coffee industry is highly competitive, with low barriers to entry for new ventures and negligible switching costs for consumers. This situation complicates the establishment of sustainable competitive advantages, or economic moats, for companies within the sector.
While Starbucks holds a significant moat due to its strong brand and expansive scale—boasting 39,477 global stores that aid in marketing, tech investments, and location scouting—Dutch Bros, with just over 900 locations, does not possess such advantages. Furthermore, its return on invested capital stands at 2.7%, significantly lower than Starbucks’ 57.1%, indicating a lesser level of established quality.
Dutch Bros’ stock is currently trading at a high valuation, with a price-to-earnings ratio of 139.4, leading to potential challenges in delivering strong investment returns. This valuation suggests high expectations for the company’s future, requiring investors to have substantial confidence in rapid earnings growth.
The argument against investing in Dutch Bros appears more convincing, leading to the conclusion that the stock may be better avoided, with expectations that it may not surpass the S&P 500 over the next six years.
