Unless you live in the western or southern parts of the U.S., you might not have heard of Dutch Bros (BROS 1.81%). Nonetheless, some investors are quite optimistic about prospects for this chain of drive-thru coffee shops. In fact, its latest financial results beat Wall Street estimates, breathing some life into the struggling shares that are currently down 64% from their peak.
Better days could be ahead. Can this coffee stock -- currently priced at about $27 a share -- hit $50 by the end of 2024? Here's what investors need to know when thinking about what would equate to an 80% gain from today's price.
This is a growth story
The reason this business is on the radar is due to its rapid store expansion. A year ago, there were 641 locations in the U.S., a figure that has jumped to 794 now. The leadership team is optimistic that one day, there will be 4,000 open. This is a truly lofty target. And investors are hoping that executives don't let up on the gas pedal.
While more locations helped overall company revenue soar 33% in the latest quarter, one area that really needs to show signs of improvement, in my opinion, is same-store sales (or comps).
On a systemwide basis, comps were up by 4% in the third quarter. To be fair, this is a huge improvement from negative growth in the first quarter. But it's nothing to write home about yet. If we look at only company-owned stores, the picture is even worse as comps for these locations increased by just 2.8% in the third quarter.
I'm sure that shareholders and the management team believe that when the economic backdrop improves, and inflation continues easing, these metrics will accelerate their gains.
There are reasons to temper expectations, though. The restaurant industry, and the market for coffee houses in particular, is probably one of the most competitive there is. There are almost zero barriers to entry for new rivals looking to establish a presence.
And in Dutch Bros' case, as it continues expanding, it will inevitably compete more directly with the likes of Starbucks, the undisputed leader in the industry with 16,300 stores scattered across the U.S. Starbucks has a proven business model, better profitability, scale advantages, and a powerful brand. Its dominance will only make things more difficult for Dutch Bros.
NYSE: BROS
Key Data Points
Set realistic expectations
Consensus analyst estimates call for Dutch Bros to post 26% revenue growth and a 51% increase in earnings per share in 2024 compared to 2023. Even if these projections come to fruition, I don't think they are enough to propel the stock 80% higher to $50 per share.
Dutch Bros will certainly need its valuation multiple to expand considerably. As of this writing, the stock trades at a price-to-sales (P/S) ratio of 1.7. Historically, shares have averaged a P/S multiple of 3.1, so things have definitely been under pressure lately as investors seem to have lost their enthusiasm.
For comparison's sake, Starbucks trades at a P/S ratio of 3.1 right now. On the one hand, you can argue that because of its long track record of financial success and strong brand recognition, this valuation is warranted.
However, this might be a signal that Dutch Bros' shares are indeed undervalued. While that could be an accurate assumption, betting on a stock's multiple to rise significantly in the next 12 months is not a prudent way to invest. This is totally unpredictable, and it's fully based on investor sentiment.
I think it's safe to assume that Dutch Bros shares will not reach $50 in 2024. The odds just aren't stacked in this outcome's favor.
