Oregon-based Dutch Bros (BROS -1.04%) is a drive-thru coffee chain known for tasty drinks with unique names, including Kicker and Annihilator. The company is opening up new locations at break-neck speed and is seemingly gaining in popularity. Even still, Dutch Bros stock is down 29% over the last year, as of Oct. 23. It even hit an all-time low in September.
In the first half of 2023 alone, Dutch Bros opened a whopping 83 new locations around the U.S. Moreover, total revenues in the first half of 2023 were up 32% from the comparable period of 2022. Investors are frustrated to see the stock drop, considering its growth has been impressive.
I'll explain some of the reasons why Dutch Bros stock is down -- there's more to investing than just growth. After that, I'll explain where I think Dutch Bros stock is going from here.
Why Dutch Bros stock keeps dropping
Dutch Bros' revenue isn't only surging in 2023. Since going public, its trailing 12-month revenue has more than doubled. That's impressive. That has helped the company's price-to-sales valuation plunge during this time, as the chart below shows.
BROS Revenue (TTM) data by YCharts
In short, the market is willing to pay much less for Dutch Bros stock now than it was when the company had its initial public offering (IPO). In fact, the decrease in this valuation metric has more than offset the impressive growth in its business.
This is extremely common for headline-grabbing IPO stocks. High-growth companies, including Dutch Bros, attract plenty of attention from investors. This often creates buying pressure right out of the gate, driving up the stock's valuation. But that initial IPO buzz eventually wears off, and the valuation comes down to more reasonable levels.
The other thing working against Dutch Bros since its IPO has been its profitability. There are many ways to measure this, but for a company like Dutch Bros, it might be best to look at operating income -- the profits the business is earning before considering non-operational expenses like debt servicing.
After going public, Dutch Bros' operating income trended lower while its revenue climbed steadily. This has recently improved mightily for the company, as the chart below shows. But this placed doubts in investors' minds about its profit potential.
BROS Operating Income (TTM) data by YCharts
An expensive valuation at IPO and questions about profitability are two big reasons that Dutch Bros stock has gone down over the last year.
Can Dutch Bros stock ever recover?
In my view, Dutch Bros is a healthy business. Its same-store sales are increasing even though the company is opening lots of new locations in areas that already have a Dutch Bros. These new locations steal some sales from older shops. Even still, same-store sales were up 3.8% in the second quarter of 2023. And they're expected to be up for 2023 as a whole.
Average unit volumes (AUV) are also healthy for Dutch Bros. This metric measures average sales volume per location annually. As of Q2, its AUV was over $1.9 million, which isn't bad for a coffee shop.
Today, Dutch Bros already has more than 750 locations. But within the next 15 years, it expects to have 4,000. Most of these are expected to be company-owned. If you believe management's projections about its opportunity, then Dutch Bros stock could be a great one to buy and hold for the next decade as it quintuples its store base.
That said, I'm a little more cautious when it comes to the long-term outlook of Dutch Bros. For starters, the company's AUV has already stagnated, only increasing 1% year over year in Q2. This suggests it could be hitting a ceiling for sales in existing markets.
When thinking of growth outside of its core markets, it's tempting to think that Dutch Bros has a wide-open opportunity. However, there are many fast-growing regional players in the drive-thru coffee space, including privately held Scooters, Biggby, and Ellianos.
Moreover, the barriers to entry in the drive-thru coffee space are low, as evidenced by 7 Brew Drive-Thru Coffee's explosive growth. It was only founded in 2016, but it already has agreements to develop over 2,000 franchised locations, according to Nation's Restaurant News. It may be able to open up franchised stores faster than Dutch Bros can open company-owned locations.
Because of competition, I'd be surprised if the unit economics for Dutch Bros improve as it grows. I think it's likely that Dutch Bros will find ways to grow its revenue but will struggle to increase earnings at a faster pace. Therefore, while it's possible for the stock to recover in time, I'm avoiding Dutch Bros for now, because I'm not convinced that it's a market-beating investment opportunity.
