Forget Starbucks: Billionaires are buying this coffee chain instead

Starbucks made big news last week with his poaching Chipotle Mexican GrillBrian Niccol’s Superstar CEO. Starbucks stock jumped more than 20% after the announcement, and it was a caffeine boost the coffee king desperately needed.

Investors have faith in Niccol’s ability to bring Starbucks back to growth, but it’s somewhat premature. It doesn’t even start until September, and it will take at least a few quarters to demonstrate the results of any new changes they implement.

But there’s another coffee chain that’s caught the attention of billionaire investors, and that’s the rookie stock. Dutch Bros (BROS 0.99%). Let’s see who’s buying and whether you should follow suit.

Billionaires bet on cheap coffee

Asset management firms with at least $100 million in assets must file a quarterly Form 13F with the Securities and Exchange Commission (SEC) detailing their transactions. Investors are always on the lookout for moves by billionaire investors, and Warren Buffett’s 13F filing, the latest of which was released last week, is making headlines.

But there are plenty of other highly-watched billionaire-led firms, and several prominent ones recently bought Dutch Bros stock. Some of these include:

• Larry Fink by Blackrock: the position increased by 177%.
• Steven A. Cohen of Point72 Asset Management: increased the position by 90%.
• Paul Tudor Jones of Tudor Investments: increased position by 82%.
• Steven Schonfeld of Schonfeld Strategic Advisors: Initiated a new position.

It’s not just the coffee that’s hot

What’s so exciting about Dutch Bros? A lot, actually. Don’t let the Dutch name fool you — it’s the modern take on the American coffee shop with a down-to-earth, down-to-earth feel. The culture is friendly and community-oriented, and the service is customer-centric and fast. In many ways, it’s like the polar opposite of Starbucks’ premium, sophisticated, urban vibe, and that vibe resonates with millions of Americans who are lucky enough to be in close proximity to a Dutch Bros. store.

The most important part of a viable business is having a valued product, so Dutch Bros ticks that box. After that, it needs a solid management team to turn it into a scalable business, and after initial success with the founder-led team, it hired a whole new C-suite to take it to the next level.

So far, so good. Revenue rose 30% year-over-year in the second quarter of 2024, driven by new store growth and a 4.1% increase in same-store sales. The company’s operating contribution margin continues to expand, up 0.5 points year-on-year to 30.8%.

Last year, it continued to go back and forth between losses and positive gains, but Q2 was the second straight quarter of positive net income, rising from $9.7 million to $22.2 million.

Close, but not perfect

There has been some pressure at Dutch Bros, but they are also operating in a precarious environment. It benefits from having cheaper prices than Starbucks, as people who want to spend on coffee might choose the lower-priced alternative. But in general, when shoppers are cost-conscious, they might rethink the need for a personalized drink altogether.

Because Dutch Bros opens new stores so quickly, it has the advantage of being able to count new stores in its revenue growth. Comparable store growth has slowed but is still better than it was a year ago. It seems to be doing pretty well considering the external winds, but the operating environment makes it more difficult to discern what is coming from the company and what is coming from external factors.

Yes, I would follow the billionaires in Dutch Bros

I often remind investors that billionaire asset managers often invest billions of dollars for their hedge funds, and their trades take this into account. They must maximize short-term gains as part of their business, so their strategies are fundamentally different from those of the average individual investor.

However, Dutch Bros looks like it could be a fabulous long-term holding for the average investor as well. These billionaires all bought Dutch Bros in the first quarter, and it has since declined, based on the near-term outlook for restaurant spending. I wouldn’t be surprised if many of them continue to enjoy Dutch Bros stock recently at its new lower price, and long-term investors with at least some risk appetite might feel comfortable watching them billionaires in a position in Dutch Bros. stock. .