Where will Dutch Bros shares be in 5 years?

It can be tempting to jump at the chance to buy a hot new stock as soon as it hits the public markets. But with shares down about 40% since its initial public offering (IPO), Dutch Bros (BROS 2.21%) is an example of why it can pay to be more patient. Let’s dig deeper to see if this innovative coffee chain can bounce back in the next half decade and beyond.

What is Dutch Bros?

Although many Americans have become familiar with it recently, Dutch Bros is far from a new company. The convenience-focused drive-thru coffee chain was founded in 1992 in Oregon before slowly spreading throughout the western United States. After becoming publicits expansion plans have accelerated as it tries to compete against established rivals such as Starbucks, Dunkin’ Brandsand Restaurant Brands Internationalhis Tim Hortons.

Although it may sound simple, the coffee industry is not for the faint of heart. Some experts estimate that 62% of independent stores fail within the first five years of operation. And Dutch Bros’ journey from its humble beginnings to a semi-national chain (with 912 locations in 18 states) speaks volumes about its value proposition to consumers.

Unlike Starbucks, which presents itself as a comfortable third space where people can get their work done, Dutch Bros focuses on speed and convenience. Its locations are only a drive away. But it balanced this around lively and friendly staff trained to personalize the customer experience.

But perhaps most importantly, Dutch Bros isn’t geared towards coffee snobs. Its menu offers a wide range of drinks ranging from sugary energy drinks to boba tea, milkshakes and smoothiesMaking it ideal for consumers who enjoy unique flavor combinations.

Why are stocks underperforming?

Dutch Bros’ Q2 revenue up 30% year after year to $324.9 million, driven by the opening of 36 new stores (up to 912) and modest same-store sales growth. Operating income rose 64% to $32.2 million. The company enjoys significant interest in its rewards program, which allows consumers to receive free drinks by making qualifying purchases.

Members accounted for 67% of all transactions in the period, suggesting this is changing Above to be a key driver of loyalty and retention.

Image source: Getty Images.

But while Dutch Bros seems to have all the ingredients for sustainable success, that hasn’t necessarily made its public stock a good investment. The biggest problem seems to be overvaluation. Despite the significant decline from the all-time high of $76, in my view the market is still pricing the stock at a higher price with a the forward price-earnings ratio (P/E) multiple of 75.

For context, S&P 500 index trades at a forward estimate of just 23, while comparable stocks are similar Starbucks or Luckin coffee trade for forward P/Es of 24 and 18, respectively. And while it’s normal for growth-oriented companies to trade at premiums, Dutch Bros’ current results don’t seem to justify its inflated share price.

What might the next five years hold?

While Dutch Bros looks overpriced based on estimated 12-month earnings, that could change in the coming years. Unlike comparable coffee chains, Dutch Bros is still relatively small. And the company could unlock a vast addressable market by rolling out its proven strategy in the US and eventually the rest of the world. Investors can short this expensive stock some weakened by its clear, untapped potential.