Everyone dreams of achieving financial independence and retiring early. It's an attainable goal for anyone, but it does require some fortunate breaks along your journey. Holding the right stocks long enough can dramatically improve your financial situation and speed up the timeline to breaking free from your nine-to-five.
Great stocks aren't easy to find, but I believe I may have found one in Dutch Bros (BROS -0.34%), an up-and-coming coffee restaurant chain that just recently IPO'd. The company has demonstrated a winning business model and has the runway to expand on it. Here's why buying and holding Dutch Bros. could pay off big down the road.
1. Coffee chain with a jolt
Dutch Bros is a coffee-shop chain that began on the West Coast. Founded back in 1992, it has since grown to 538 stores that generated $498 million in revenue in 2021. Dutch Bros shops are typically small and emphasize drive-thrus and quick service. The menu features cold-brew products like coffees, chilled energy drinks, and smoothies. Energy drinks are an especially big part of the business; its Rebel brand represents 24% of total sales.
Image Source: Getty Images.
What investors should hone in on is the company's accelerating store growth. Dutch Bros opened 20 stores annually, on average, from 2011 to 2016. But over the past five years, the company has been averaging 52 stores per year. The company opened up 98 stores in 2021 and has guided for another 125 in 2022.
Meanwhile, same-store sales are picking up momentum coming out of COVID-19, growing 8.4% year over year (YOY) in 2021. And overall revenue jumped 52% in 2021, higher than the company's 39% average over the past four years. Dutch Bros is launching more stores faster, so if same-store sales remain strong, revenue growth should continue gaining steam.
Looking long term
The company's revenue growth is impressive, but to generate life-changing wealth it will need to be sustainable for years to come. So investors will want to keep an eye on same-store development; it will tell you how well the brand is doing. Currently, Dutch Bros is regional with its stores concentrated in the West and Southwest United States.
Compare the company's current 538 stores to the more than 15,000 locations that Starbucks has in the U.S. It took Starbucks decades to grow to this size. Still, if you're looking to own stock in a business that will set you up for retirement, it needs to have a multi-decade runway, and I think Dutch Bros can grow at a robust pace for many years, even if it never comes close to the store count that Starbucks has.
Should investors worry about Starbucks and other competitors? Of course! You can keep an eye on same-store sales to ensure existing shops thrive. However, I don't think competition is a great reason to write the stock off. Dutch Bros started on the West Coast, just a "stone's throw" from where Starbucks is based, and has proven its ability to survive and thrive.
Is the stock a buy today?
Starbucks is the most direct competitor to Dutch Bros, and you can compare how the market values each stock in the chart below. Dutch Bros is the more expensive stock currently, trading at a price-to-sales ratio of 5.4 versus 3.2 for Starbucks.
However, it's probably fair to argue that the company growing twice as fast should get a higher valuation. I don't think Dutch Bros is trading at an unreasonable price; it deserves a premium.
BROS PS Ratio data by YCharts.
However, that's not a pass to chase the stock at any price. Fortunately for investors, the stock has recently cooled some -- trading now in the low $50s, down from its high of $81.
Keep in mind that high-quality business will grow in valuation over time. Dutch Bros is a stock positioned to win over the years ahead, which won't be decided tomorrow or even in a year. A long-term approach will help your mindset and give you the patience to let Dutch Bros execute, grow, and steadily create value for shareholders over time.
If you're still unsure about the stock's price tag, you can use a dollar-cost averaging strategy, where you slowly buy a little at a time, helping to smoothen out some of the volatility in your shares. Either way, Dutch Bros has the brand and path to growth to be a big winner down the road, and its $8 billion market cap is still small enough to make the stock a multi-bagger over time. It's now up to the company to keep performing at a high level and for investors to see it through.
