4 reasons to buy Dutch Bros stock like there’s no tomorrow

Upstart coffee and craft beverage chain Dutch Bros (BROS 0.33%) released its earnings report on August 7. The company grew sales and adjusted earnings per share (EPS) by 30% and 46%, respectively, beating analysts’ expectations. Despite those impressive results, the market sent Dutch Bros stock down about 21% as the company acknowledged that its new store openings would be closer to the lower end of its 150 to 165 store count in 2024.

While this reaction to a potential slowdown in expansion plans is understandable for a growth stock like Dutch Bros, wiping out a fifth of the company’s value in 24 hours seems like an overreaction. Because of this significant decline — and the four reasons I’ll discuss below — I can’t help but be bullish on Dutch Bros stock right now.

1. Dutch Bros’ growth marathon is in its infancy

Even though the company doubled its store count from 441 locations in 2020 to more than 900 stores today, about 75 percent of Dutch Bros. locations are in just five states: Washington, Oregon, California, Arizona and Texas. This unique density of locations in certain states is attractive in terms of the company’s long-term potential for two reasons.

The first is quite simple – there is a massive greenfield expansion opportunity for the company. It currently operates in only 16 states in the western and southern United States, but Dutch Bros believes the number of stores could grow to more than 4,000 in the coming decades as it expands geographically.

Second, despite being heavily concentrated in five key states, the company is profitable. It is shown to be able to effectively add new stores in a given city or state where it already operates without eating into its own profits.

2. Dutch Rewards members

Part of the reason Dutch Bros has proven successful in growing store numbers without having to rely heavily on geographic expansion so far is that it has a very loyal customer base. It generates 67% of its transactions from Dutch Rewards members in its most recent quarter, so the company’s ability to retain customers is top notch.

In addition, this successful rewards program allows the company to obtain information from its customers. This data helps Dutch Bros create offers that its members would be interested in and then allows the company to promote these new products directly to its members, keeping them engaged with the brand.

Image source: Dutch Bros.

3. Innovating to maintain a high level of customer satisfaction

Based on this information, Dutch Bros can launch new product ideas, such as its new Poppin’ Boba drinks, protein coffees or the limited-time “Gold Medal Rebel” energy drink. Dutch Bros generates about 50% of its sales from coffee, 25% from energy drinks and 25% from teas, lemonades, smoothies and juices.

In addition to new flavors, the company is collecting ideas that its customers would like to see implemented, such as mobile pre-order capabilities. They are quickly testing and implementing this idea, and Dutch Bros believes that most of its stores will support pre-order purchases by the end of the year.

In addition to ordering ahead, Dutch Bros focuses on locations that use “escape colors,” which allow customers to leave as soon as their order is ready, and drive-thru windows for purchases that can’t be made with a drive-thru.

4. A recently lowered (and perhaps cheap) valuation.

While it’s difficult to assign a valuation to growth stocks like Dutch Bros, its price-to-sales (P/S) ratio of 1.9 is lower than that of S&P 500 index average of 2.8, despite the company’s much faster growth rate. Additionally, while Dutch Bros has yet to achieve positive free cash flow (FCF) due to high capital expenditure (capex) spending on new stores, its cash from operations (CFO) is robust at 17% from sales.

BROS data on Revenue, Cash from Operations and CapEx (TTM) from YCharts

What this 17% margin means is that if the company decided it was done building new stores and only spent capital on maintenance, it would create an amount of FCF for investors (since FCF equals CFO minus equity).

Based on the price to CFO, the company looks deeply undervalued. It even trades at a valuation below that of its massive peer, Starbuckswhich already has 18 times more locations than Dutch Bros in the US

BROS and SBUX data for CFO price per share (TTM) by YCharts

As cheap as its valuations are, Dutch Bros needs to be monitored for continued shareholder dilution. Quite simply, the company is famous for issuing new shares to fund its growth — it has doubled its outstanding shares since its initial public offering in 2021. As Dutch Bros grows, it will be critical for investors to see that the company will eventually generate enough CFO. to self-fund its capex over the next year or so, making it a more shareholder-friendly growth machine.