When Dutch Bros (BROS -0.66%) began trading on the public markets in September 2021, it took the investing world by storm. The stock skyrocketed 108% by Nov. 1, a month and a half after the initial public offering (IPO). That was a monster gain, highlighting how much investors immediately fell in love with the business.
That's probably because Dutch Bros promised stellar growth prospects, something that at first might have convinced investors that the stock could be a winning holding. But shares are down 21% since the IPO as of March 17, following general weakness in the broader market.
So, what's in store for this top coffee stock over the next five years? Let's take a closer look.
Taking the coffee world by storm
Dutch Bros is a nationwide franchisor and operator of drive-through coffee shops. As of Dec. 31, there were 671 total stores, with 275 of them franchised. The company has been rapidly growing. Revenue was up 48% in 2022 and 52% in 2021 on a year-over-year basis. And in the most recent quarter (Q4 2022, ended Dec. 31), Dutch Bros increased sales by 44%, showing steady gains throughout the year.
This recent growth occurred in the face of macroeconomic headwinds. Inflation has been eating into consumers' wallets, making them think long and hard about spending on discretionary items, a category that out-of-home coffee certainly belongs in. This backdrop makes the company's expansion even more noteworthy.
What's impressive about Dutch Bros' remarkable financial performance thus far is that it's quickly achieving growth in an industry that has long been dominated by household names such as Starbucks and Dunkin' Donuts. If the past few years are any indication of what the future holds, shareholders have a lot to get excited about as we look ahead.
Outstanding growth prospects
Speaking of the future, Dutch Bros' management team, unsurprisingly, is incredibly optimistic about the direction the company is heading in. Management believes there can be 4,000 locations across the country within 10 to 15 years. That would imply about a 500% expansion from its current size. And just this year, the business plans to open at least 150 new shops.
Because Dutch Bros possesses such strong unit economics, it makes sense to aggressively open new locations. The average company-owned shop generated $1.9 million in annual sales in 2022, with a contribution profit margin of 24.6%. This margin tells us the profitability at the store level, excluding any corporate overhead expenses.
Wall Street is very optimistic. Consensus analyst estimates call for revenue to increase at a compound annual rate of 25.1% between 2022 and 2027. That's well below the roughly 50% gains registered in the past two years, but it's still good enough to put Dutch Bros in the category of a growth stock. Perhaps even more exciting is that the company is projected to generate $227.6 million in operating income in 2027, compared with a $2.6 million operating loss in 2022.
Looking at the valuation
As of this writing, Dutch Bros stock is trading at a price-to-sales (P/S) multiple of just over 2, which is well below its historical average of 3.7 and just about as cheap as it's ever been. There are two takeaways from this performance. One is that the pessimism surrounding the business has never been this high, and that makes sense given just how positive the sentiment was when Dutch Bros went public. The other takeaway is that if Dutch Bros can execute on its lofty growth targets over the next few years, the stock could produce market-beating returns thanks to its low current valuation. For comparison's sake, Starbucks is trading at a P/S ratio of 3.5 right now.
One thing shareholders must keep in mind with Dutch Bros is that it has posted net losses in each of the past two years, although 2022 turned in a far lower loss than 2021. Consequently, the question investors need to seriously consider is when, if at all, Dutch Bros will reach sustainable profitability. And I think this emphasis on producing positive net income is even more relevant, given how much investors soured on unprofitable growth stocks last year.
But for those who remain optimistic about where this company is going, then it might make sense to take advantage of the current valuation. In five years, your portfolio could be better off because of it.
