With its global footprint of almost 37,000 locations, there's no doubt that Starbucks (SBUX 0.27%) has long dominated the quick-service coffee industry. It has incredibly strong brand recognition, which is key to its success. But because Starbucks is already ubiquitous, some investors worry that its growth prospects going forward aren't so great.
For those looking for higher growth, an up-and-coming coffeehouse chain called Dutch Bros (BROS 1.77%) presents an interesting alternative. Although the stock price is down 63% from its peak, here's why it's a growth stock worth considering buying right now.
Dutch Bros' growth has been outstanding
As of March 31, Dutch Bros had 716 stores, mainly in the western part of the U.S., that serve coffee, espresso beverages, energy drinks, and smoothies in a drive-thru format. In comparison with Starbucks, it doesn't sound all that impressive. But consider that, at the end of 2015, Dutch Bros had just 254 shops. The company's expansion has been robust, with 133 new stores opening last year and an additional 45 locations in the first three months of 2023.
Along with locations, revenue has skyrocketed. Sales increased by about 50% in both 2021 and 2022. By comparison, Starbucks saw revenue jump at an annualized rate of 17% during those two years. Dutch Bros must be doing something right if more and more consumers are buying what it's selling.
Over the long term, Dutch Bros leadership team has huge hopes. "This continued underlying strength provides encouragement as we execute against our long-term goal of 4,000 shops in the next 10 to 15 years," said CEO Joth Ricci on the Q1 2023 earnings call. If the goal is reached, it would translate to a nearly sixfold expansion of the footprint. You'd struggle to find any restaurant concepts with this type of growth potential.
There are some risks with Dutch Bros
Having growth stocks in your portfolio can definitely help increase the chances of strong portfolio returns. But with Dutch Bros, there are some risks that investors should keep in mind.
For starters, most of the revenue gains in recent quarters have come from new store openings and not same-store sales. This could be a reason to worry. Of course, entering new markets and opening new locations will lead to higher revenue, but if each specific store isn't growing its sales at a healthy clip, then maybe management is better off investing that capital into other growth initiatives.
Investors should keep a close eye on same-store sales trends going forward. Hopefully, these figures will improve as the economy gets on better footing.
In 2022, Dutch Bros posted a net loss of $19 million. And although the net loss of $9.4 million in the latest quarter was a meaningful improvement compared to the year-ago period, one thing is strikingly clear -- this is a money-losing enterprise right now. To be fair, the business is in full-on growth mode, and shareholders are generally OK with seeing short-term losses with the expectation of seeing lots of net income in the future.
But this is far from being a certain outcome. Therefore, it's really a good idea for investors to pay attention to the bottom line.
Dutch Bros' valuation provides potential upside
Despite the challenges I just discussed, Dutch Bros' stock has huge upside potential. Shares are down almost two-thirds from their all-time high. And they now trade at a price-to-sales (P/S) multiple of 1.9. That P/S ratio is well below the stock's historical average of 3.5.
According to Wall Street consensus analyst estimates, the business is projected to increase revenue by almost 24% annually between 2022 and 2027. That outsized growth potential, coupled with a depressed valuation, might be enough of a compelling reason for investors to buy Dutch Bros' stock, even keeping in mind the issues I mentioned.