Starbucks (SBUX 0.47%) has long dominated the retail coffee market, as its historical track record of growing revenue and profit indicates. Its shares have done well too, up almost 1,400% in the last 20 years. 

But in an industry known for intense competition, it can't be a surprise that Dutch Bros (BROS -1.04%) is quickly ascending to challenge the leader. Its shares have jumped 17% in 2023, well outpacing Starbucks' 1% return. 

Investors looking to put money into just one of these coffee stocks will be able to make a more informed decision only after considering some critical information about each.

The fast-growing challenger 

One of the obvious reasons to fall in love with Dutch Bros is its incredible growth. Between 2019 and 2022, revenue increased at a compound annual rate of 46%. And in the latest quarter (Q2 2023 ended June 30), sales were up 34% year over year, an even faster clip than Q1. These gains have been bolstered by a rapidly expanding physical store count, which has gone from 370 at the end of 2019 to 754 today. 

While it might have been a valid argument to completely write off buying the stock simply because the business has long been unprofitable, things might be changing for the better. Dutch Bros registered positive net income of $9.7 million last quarter, compared to a $1.8 million net loss in the year-ago period. In fact, this was the second quarterly profit the company posted in the last eight quarters. 

Achieving profitable growth is an encouraging sign, but it's hard to make a compelling case that Dutch Bros possesses any competitive advantages. In this industry, scale matters, mainly to benefit from operating leverage to increase profits greater than sales.

But the larger and more popular a chain gets, the stronger the brand can become as well. Dutch Bros is tiny in the grand scheme of things, so it still has a lot of work to do. 

Shares currently trade at a forward price-to-earnings (P/E) ratio of 220. The stock appears to fully reflect investor enthusiasm surrounding the business. This means that if Dutch Bros doesn't flawlessly execute on its growth ambitions, investors could be disappointed. 

The dominant coffeehouse chain 

Unlike Dutch Bros, Starbucks has already achieved massive scale, thanks to its global store footprint of 37,222 locations and trailing-12-month revenue of $35 billion. This incredibly wide reach has propelled the company's strong brand, known across the world for its consistency, high quality, and premium nature, which resonates extremely well with consumers. 

The brand is boosted by Starbucks' successful digital platform that increases accessibility and convenience for customers, while at the same time driving repeat purchases and greater loyalty. As of July 2, the company had 31.4 million 90-day active Rewards members in the U.S. who accounted for 57% of sales at company-owned stores during the latest quarter. This valuable channel can also be used for marketing purposes. 

Even though it's already a global enterprise, Starbucks isn't done expanding yet. Management sees the potential to have 55,000 stores open worldwide by the end of the decade. A lot of the gains will likely come from China, unsurprisingly, thanks to the country's huge middle class, whose buying power will only rise going forward. By fiscal 2025, the leadership team wants to increase the store count to 9,000 in China from 6,480 today. 

Dutch Bros rarely produces positive net income, but Starbucks has been doing so for a long time. Starbucks is able to generate free cash flow, to the tune of $2.6 billion in fiscal 2022 (ended Oct. 2 of last year). And this lets management return capital to shareholders in the form of dividends (currently yielding 2.1%) and buybacks. These further enhance returns. 

Investors who might be more risk-averse will probably prefer to own Starbucks in their portfolios. But I can also see why Dutch Bros, thanks to its impressive profitable expansion, would be an attractive stock for growth-minded investors.