Dutch Bros (BROS -1.04%) is a rapidly growing coffeehouse chain that most investors likely aren't familiar with at this point. It also doesn't help that the stock has been crushed, as it's currently off about 63% from its all-time high, which was set in November 2021.
But Dutch Bros shares have been on an upswing lately, rising 15% in the last month. Is this momentum enough to make the restaurant stock a smart buy right now?
Let's take a closer look at the factors that investors should consider in their decision-making process.
It's a growth story
Dutch Bros operates drive-thru locations throughout the U.S. that sell espresso-based beverages, in addition to smoothies, juices, and teas. This business model isn't anything revolutionary, but the company's success thus far is admirable.
In the most recent quarter, Dutch Bros revenue jumped 33% year over year to $265 million. This was on top of 53% growth in the 2022 third quarter.
Key to these tremendous gains has been a rapidly rising store count. Dutch Bros currently has 794 shops in its system across the country (510 are company-owned and 284 are franchised), compared to 641 12 months ago. Management expects to open 150 new locations this year.
The leadership team has bigger ambitions over the long term. During the third-quarter earnings call, CEO Joth Ricci once again mentioned that the ultimate goal is to have 4,000 stores open one day.
Should the business be successful and expand the footprint fivefold, revenue will be astronomically higher than it is today. And this can help support huge stock returns for investors.
Cheap valuation
It's totally understandable that investors would be compelled to buy Dutch Bros stock.
The growth is impressive, no doubt. Plus, shares are currently trading at a price-to-sales ratio of 1.8. In the company's entire public history, the cheapest multiple the stock sold for was 1.5, and the historical average is 3.1.
It's safe to say that this is a cheap valuation. And for some investors, this might be too good of a deal to pass up.
Reasons to be concerned about Dutch Bros stock
However, I'm not so convinced. In fact, I believe it's best that investors avoid this stock. Let's look at two reasons why.
The majority of this company's growth is coming from expanding the store count. Consequently, same-store sales gains, which measure the change in sales for shops open at least 15 months, is one of the most critical metrics to pay attention to. In the last quarter, this figure only increased by 4% systemwide, after rising 3.8% in the second quarter and declining 2% in the first quarter.
This worries me. Starbucks, the leader in the industry that has more than 16,300 stores in the U.S., saw comparable sales jump 8% in the domestic market in the fiscal 2023 fourth quarter (ended Oct. 1).
You would be right to assume that a younger, more growth-oriented business like Dutch Bros should be posting faster same-store sales gains than a mature enterprise like Starbucks. But this clearly isn't the case. And maybe it's a sign that Dutch Bros is plateauing in the markets that its stores are in.
Perhaps the most important reason to avoid buying this stock is because there is no economic moat supporting Dutch Bros' competitive position. Anyone with enough capital could open up a coffee shop tomorrow, creating minimal barriers to entry. This translates to the restaurant space being arguably the most cutthroat industry there is.
Over the past five decades, Starbucks has developed a wide moat thanks to its incredibly strong brand recognition. It has an unmatched standing in the minds of consumers, something a much smaller operation like Dutch Bros is a long way from achieving.
In my opinion, this business still has a lot to prove before it can be considered a worthy portfolio addition.
