Where will Dutch Bros shares be in 5 years?

The main rules of successful investing are quite simple: Buy low, sell high. There are some tricky parts though, such as determining low prices and whether or not they will go up.

Dutch Bros (BROS -1.76%) the stock is trading at a low price right now. Let’s see where it might be in five years and if it deserves a place in your portfolio.

More fun in your coffee

Dutch Bros makes coffee differently than the mammoth chain Starbucks and other coffee chains. Although it’s been around almost as long as Starbucks, it was a small regional chain for decades before spotting an opportunity to expand its business a few years ago. It perfected its model for replication and went public as a company with part-owned and part-franchised stores. Since it began its growth phase in the digital age, it has been opening stores with new trends in mind, which Starbucks, with its 39,000 existing stores, has a hard time doing. Dutch Bros has 912 stores at the end of the second quarter, up from about 500 when it went public in 2021.

However, Dutch Bros only recently launched a mobile ordering program. It expanded rapidly, even without what would seem like a major program these days. This is another proof of how much customers love his product. Its focus is less on digital and more on creating a culture of community and connection.

Dutch Bros has a completely new C-suite with experience in the retail and restaurant industry. It enhances the company’s mission and operations and brings out new innovations like the mobile program, which should serve it well as it continues to expand. I’ll be watching how much value the digital ordering program adds to the overall opportunity here.

Opening up its niche

You can see the results of his efforts in his financial performance. The growth has been quite high and it is growing profitably. These are two important pieces of a viable company with future growth potential.

Revenue rose 30% year over year in the second quarter. Most of the growth comes from new stores, and comparable sales growth is something to watch. It’s been back and forth between strong and weak, and 4.1% in the second quarter looks somewhere in the middle. There is pressure with inflation and that makes this look more like a result of external headwinds than internal factors. Dutch Bros is expanding at a time of great uncertainty.

What makes it look more impressive is that it is turning profitable and expanding its margins despite inflation. Company-operated stores gross margin was 23.7% in the second quarter, up 0.1 percentage points from last year, and company-operated stores contribution margin was 30.8%, in increase of 0.5 percentage points compared to last year. Net income increased from $9.7 million to $22.2 million.

Because Dutch Bros is a small, growing company, it will look very different in five years. It will have a lot more stores, first of all. It plans to open at least 150 stores this year, and if it continues at this pace, it should reach more than 1,600 stores. That’s still small compared to its goal of 4,000 over the next 10 to 15 years, and new stores should continue to drive big growth. If inflation moderates in the next few months and interest rates fall as expected, trends should reverse in its favor. This should lead to comparable growth in sales and profitability over the next few years.

Buy low, sell high

Despite the strong performance and massive opportunities, Dutch Bros shares are down 14% from the first day’s closing price. At the current price, it trades on a price-to-sales ratio of 2 and a forward P/E ratio of 65.

Dutch Bros fell ahead of a second-quarter report on analysts’ concerns about the restaurant industry and fell further after the report based on management’s update that the number of new stores would come in at the lower end of full-year expectations.

Management framed this in the context of renewing development plans with new insights from recently opened stores and changing real estate trends. This might be reasonable and even positive, but these types of changes could mean something deeper and alarm investors. This is likely to be a short-term issue and the number of openings is still within management’s projected range. In other words, in light of Dutch Bros’ other positive updates and opportunities, this doesn’t seem like anything to get excited about. It did, however, lower the price and make it more palatable for investors on the fence.

In five years, Dutch Bros stock should be much higher than it is today, and you’ll regret not taking advantage of this opportunity to buy on the dip.