There is a high correlation between revenue growth and a stock's return over many years. When shares of high-growth companies fall sharply amid a broad market sell-off, the markets are handing investors an enormous financial gift that will only manifest itself a decade or two down the road.
Two companies in the early stages of growth are Chewy (CHWY 2.00%) and Dutch Bros (BROS 0.95%). These stocks are trading well off their highs, which makes now a good time to buy.
NYSE: CHWY
Key Data Points
Chewy
Investors looking for a stock that could rocket higher over the next decade should look no further than Chewy, a leading e-commerce pet care company. Online pet care was estimated at $97 billion last year and expected to grow about 10% per year. Chewy already has a large base of 20 million customers and a record of consistent above-average revenue growth.
Chewy continues to win customer loyalty through its expanding selection of products and services. Nearly three-quarters of its total sales come through its autoship program, where customers can have their preferred pet food, for example, shipped to their door on a regular schedule. Chewy is reinvesting the profits from existing customers into winning more customers through marketing and expanding into pharmacy and other health services. These ancillary services are higher-margin revenue and build customer loyalty.
Improving margins is a key indicator that the stock is ready for take-off. In addition to offering health services, such as pharmacy, the company can boost profits over the long term by building more automated fulfillment centers. Sure enough, Chewy has seen its profit margin gradually increase in recent years and should continue to expand in the future. This comes after the company launched its fourth automated fulfillment center earlier this year.
CHWY Profit Margin data by YCharts.
The stock has been choppy over the past year, but Chewy is clearly building a more profitable and growing business that points to big returns over time. Revenue grew 15% year over year in the fiscal quarter ending in April, which brings Chewy's current price-to-sales ratio down to 0.97 -- a bargain for a fast-growing e-commerce business. The relatively low stock price is only creating a larger gap from where the stock will likely trade over the next 10 years and beyond.
Dutch Bros
Dutch Bros is a fast-growing restaurant concept that could be another rewarding investment you'll want to own for the long haul. It's often compared to Starbucks, but it's much more differentiated than that. Dutch Bros sells various cold beverages, including smoothies and a range of flavorful energy drinks.
The brand has been around for about 30 years, but after going public a few years ago, management is taking things to the next level with a broad U.S. expansion plan. And it's proving to be successful.
Revenue has nearly tripled since the end of 2020, with traffic growth driving positive sales from older shops. The lackluster stock performance can be blamed on an expensive valuation when the company first went public, especially since Dutch Bros hasn't reported much profit as a public company yet. But its shops are starting to show improving margins. Best of all, Dutch Bros ended the last quarter with only 754 shops but could potentially open thousands.
NYSE: BROS
Key Data Points
Operating in just 14 states, Dutch Bros has a long way to go to reach its potential. One important quality that gives Dutch Bros a competitive advantage is its culture. The founders have followed a policy of promoting new shop managers from within the company. It has a deep bench of operators with an average tenure of seven years at the company, and managers are incentivized to offer good customer service and drive shop traffic -- two must-have factors in building a successful restaurant chain.
Another quality to like about Dutch Bros is that it is delivering strong growth while leveraging costs to boost margins and profits. In the most recent quarter, company-operated shop gross profit increased 67% year over year, much faster than the 34% increase in revenue, which turned last year's net loss per share into a profit of $0.05 for the quarter.
The stock is down 23% since it started trading a few years ago, but considering Dutch Bros' record of high revenue growth and improving margins, this stock has all the makings of a long-term winner. Buying shares of fast-growing restaurants in the early stages of growth can generate spectacular returns for investors. As it begins to report growing profits in step with revenue, the stock could take off.
