Should You Buy Dutch Bros Stock While It’s Below $40?

There are pockets of the market that can offer investors growth opportunities that don’t have to be tied to the tech sector or the artificial intelligence (AI) trend. Dutch Bros (BROS 2.21%) this is proof.

But the stock has been a disappointment in recent years. They have lost about 13% of their value since their initial public offering in September 2021. Some people might see this as a good opportunity to make a move.

You should buy this mid cap stock while trading well below $40 per share? Here’s what investors need to know.

Dutch Bros is in growth mode

Dutch Bros is likely a top choice for investors looking for growth potential in the restaurant sector. The company reported a 30% increase in revenue in the second quarter (ended June 30). This was partly driven by same-store sales growth of 4.1%, which is healthy given the uncertainty across the economy.

Another important part of Dutch Bros’ strategy is expanding its physical footprint. After opening 30 new locations in the last three months, there are now 671 stores in the US. Executives have explicitly stated that the goal is to reach 4,000 locations in the next 10 to 15 years.

When companies are fully focused on expansion, as is the case here, profits are usually not reported. Here’s where Dutch Bros bucks the trend. net income grew by about 130% from $9.7 million in Q2 2023 to $22.2 million in the last quarter. Expenses are growing at a slower rate than the top line, a positive trend.

According to Wall Street consensus analyst estimates, the business is expected to grow sales and earnings per share at compound annual rates of 22.3% and 25.3%, respectively, between 2023 and 2026. That’s a robust outlook.

Evaluation and quality

At the time of writing, the stock is trading 58% below its peak, which was set during the last bull market environment in late 2021. Investor sentiment has cooled considerably since that record was reached. But the stock still looks extremely expensive at a price-to-earnings ratio of 127.

For some investors, however, this may not matter. The bulls believe Dutch Bros can one day reach the target of 4,000 stores. To be clear, these are the only people who should be buying the stock. This is because the current assessment is likely that this favorable outcome is more likely to occur. And if the business achieves this goal, the revenue and earnings will definitely be much higher than they are today.

I’m not as confident. In fact, I think Dutch Bros still has a lot to prove before it’s worth investing in.

One of the reasons I feel this way is because I don’t think the business has a economic moat. Despite his recent struggles, Starbucks clearly dominate this industry. Over the decades, it has developed sustainable competitive strengths arising from strong brand recognition as well as cost advantages.

Dutch Bros doesn’t hold a candle to Starbucks’ long-standing relevance. And with the latter having a store base that’s roughly 25 times the former’s footprint in the US alone, Dutch Bros has a long way to go before it can be mentioned alongside the market leader.

Investors always fall in love with a good growth story. But the reality is that strong growth doesn’t last forever. With Dutch Bros, there is a downside if earnings slow down, something I wouldn’t be surprised if it did. The retail coffee industry is one of the most competitive around, with no barriers to entry or switching costs.

Even at a price below $40 per share, investors should stay away from Dutch Bros.