January 25, 2025
Investors must have really been pleased with Dutch Bros ' (NYSE: BROS) third-quarter 2024 (ended Sept. 30, 2024) financial results. That's because shares have soared 74% at this writing since the earnings release on Nov. 6 last year. This is a much better gain than the 3% rise for the overall S&P 500 .
Investor sentiment is certainly on the upswing, momentum that has carried over into the new year. Is Dutch Bros a smart growth stock to buy with $200 right now? With that amount, investors could scoop up three full shares and about one-third of a fractional share .
During the third quarter last year, Dutch Bros reported 28% year-over-year revenue growth. That comes on the heels of a 33% jump in Q3 2023. And that latest figure is up 290% versus the same period four years ago in 2020. Driving top-line growth hasn't been an issue for this business, which is probably what got investors so excited.
There's an obvious reason for Dutch Bros' rapid expansion. The company, which operates quick-service coffee shops in 18 states, continues to open new locations at a brisk pace. It opened 38 net new locations in the third quarter of 2024, bringing the total to 950. That's nearly double the count from exactly three years before.
Management isn't close to being finished. The target has been set to get to 4,000 stores within 10 to 15 years. That implies fourfold expansion, a scale at which revenue is sure to be markedly higher.
Growth-oriented investors might have Dutch Bros on their watch lists. But does the business possess durable competitive strengths? I'm not so sure.
Despite its latest challenges, Starbucks , the longtime industry leader, still possesses a powerful brand. One sign of a strong brand is the ability to replicate success in the U.S. in overseas markets. Starbucks has done this. Dutch Bros isn't even in half of all U.S. states, let alone in other countries. Time will tell if the brand resonates with a larger audience.
Pricing power is another gauge of brand strength. Dutch Bros' systemwide average ticket size has increased in at least the last seven straight quarters. However, transaction counts decreased in five of those quarters, demonstrating hesitation on the part of the consumer.
With its 40,199 total locations and $36 billion in fiscal 2024 sales, I'd argue Starbucks has some scale advantages, too. Its trailing-three-year average operating margin of 14.3% is light years ahead of what Dutch Bros has done. Being able to better leverage expenses leads to improved profitability.
This isn't to say that Dutch Bros can never fully develop an economic moat . I just believe that it's not there at the moment.
And given the intensely competitive nature of the restaurant sector broadly, and the retail coffee market specifically, it's difficult to have high confidence that the business will possess lasting competitive advantages one day. Too many things need to go right. This adds risk to the equation because it means Dutch Bros' ultimate success is far from a virtual certainty.
Dutch Bros' stock has been on a tear, up 123% just in the past 12 months. It's falling in the good graces of investors once again. But it still trades 20% below its all-time record from the strong bull market of late 2021. Some investors might find the dip too compelling of an opportunity to pass up.
I'm taking a less optimistic stance. The stock is expensive. The price-to-earnings ratio of 210 indicates extremely heightened expectations about the future trajectory of this company. Even the price-to-sales multiple of 4.8 is 60% higher than the stock's historical average.
Investors looking to put $200 to work should avoid this growth stock.
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