For many coffee drinkers, Starbucks (SBUX -0.35%) has become a household name. After decades of growth, it's difficult to travel anywhere and not see a Starbucks location. However, for those who live in the 14 states where Dutch Bros (BROS 0.04%) operates, its rapid store-count growth and unique drive-thru experience may be turning some heads.
Starbucks has been a massive winner for investors over the 30-plus years it's been a publicly traded company. Conversely, Dutch Bros made its initial public offering (IPO) in September of 2021 and is growing rapidly. Investors may be wondering which is the better buy in 2023, so here's the case for each company.
Starbucks
Since its IPO, Starbucks stock has gained almost 39,000%. Put another way, a $10,000 investment on its first day trading as a public company would be worth $3.9 million today. By comparison, the same investment in an S&P 500 index fund would be worth approximately $189,000. However, the last few years have been more difficult for the company, with its total return matching that of the S&P 500 since the beginning of 2020.
This makes sense considering the impact of the pandemic. At various times since the pandemic began, Starbucks has seen some or nearly all of its locations closed as countries all over the world went into lockdown. While the impact of the pandemic is largely behind Starbucks, that's not yet the case in China, which is the company's second-largest market.
In the recently reported first quarter of its fiscal 2023, Starbucks posted mixed results. Compared to the year-ago quarter, revenue increased 8% while comparable store sales rose 5% overall and 10% in the U.S. However, international results were materially impacted by China, where its comparable store sales fell 29% due to COVID-19 lockdowns.
To demonstrate the impact of China on overall results, consider that earnings per share (EPS) for the quarter came in at $0.74, a 7% year-over-year increase. Removing the impact from China, and EPS would have been $0.80 and growth would have been 16%. China is clearly a vital part of Starbucks' growth story moving forward.
On the Q1 earnings call, management stated that the situation in China has improved and while they stopped short of predicting when the China business would fully recover, they expect the second half of 2023 will be stronger than the first half. If true, Starbucks stock could end the year in a much better place than it began.
Dutch Bros
In sharp contrast to the global reach of Starbucks, Dutch Bros operates in fewer than half of the states in the U.S. and relies on a different business model to serve its customers. Its drive-thru-only locations specialize in speed and quality, with tablet-yielding employees greeting customers at their car windows to take their custom orders.
So far, the results have been impressive. From 2015 to 2021, Dutch Bros grew its store count 112% and expanded from seven states to 12. The company sees the potential for at least 4,000 locations in the U.S. While that goal may be ambitious, reaching even half of that target would be more than a 200% increase from its current store count.
Dutch Bros has only reported results for five quarters as a publicly traded company, but it has shown some impressive growth over that time. Year-over-year revenue growth has never been below 44% and the company has made consistent progress toward profitability. In the most recently reported quarter, Q3 of 2022, net income was $1.6 million compared to a net loss of $117 million in Q3 of 2021.
Which stock is the better buy?
For investors looking for market-beating returns with less downside risk, Starbucks may be the better option. The exposure to China is both a risk and an opportunity. If China sales can return to, or exceed, their pre-pandemic levels, the stock looks like a good buy right now at 3.7 times sales, below its 10-year average. Add in the dividend and Starbucks looks even better.
However, Dutch Bros is so early in its journey that it's hard to ignore its potential. For those who didn't have an opportunity to own Starbucks shortly after its IPO, buying Dutch Bros could be tempting. That said, Dutch Bros has a long way to go before it can be compared to Starbucks. I think taking a reasonably sized position in the company could make sense to see if Dutch Bros can continue to execute.
Forced to make a decision, I would buy Starbucks. I find Dutch Bros intriguing, but I still think there's enough future growth opportunity in China to make Starbucks my pick. But I will be watching closely to see if the China reopening plays out like management anticipates.
