Management for drive-thru coffee chain Dutch Bros (BROS -1.04%) is quite open about its long-term vision for the company. It intends to have 4,000 locations someday, up substantially from its 794 locations as of the third quarter of 2023.
Using this long-term goal as a guide and looking at current business trends, investors can try to approximate where Dutch Bros stock will be in 10 years. And this will help determine whether it's a good stock to buy today.
What the next decade could look like
In 2022, Dutch Bros opened 133 new locations. And in 2023, it's on pace to open at least 150 new locations. This was good for 25% and 22% respective annual growth.
For restaurants growing by opening new locations, maintaining over 20% annual growth is really hard, if not impossible. It's probably better to assume closer to a 10% annual increase in its store count over a decade.
At 10% annual growth, Dutch Bros would have just over 2,000 locations in 10 years -- around halfway to its long-term goal. This seems like a possible outcome if things go well.
While investors don't know the exact pace of new store openings, Dutch Bros has said that most of its new stores will be company-owned, not franchised. For perspective, roughly 90% of new locations in 2022 and 2023 are owned by the company. This will boost the top line considerably.
On its current path, Dutch Bros' growth is unlikely to be limited by its finances. Through the first three quarters of 2023, the company reported operating income of $44 million -- strong profitability while it's simultaneously expanding. Given that these are drive-thru shops, the cost to open a new location is low, relative to larger sit-down chains. Moreover, Dutch Bros is recently debt-free and has roughly $150 million in cash and equivalents.
In short, it doesn't cost Dutch Bros much to grow, which allows it to go fast. It has ample resources to fund growth. And it's profitable, meaning it's getting financially stronger. This is all good.
To guess a future valuation, consider that Dutch Bros averages about $2 million in sales per location right now. Conservatively assuming this stays the same, the company could have annual revenue of $4 billion if it has 2,000 mostly company-owned locations 10 years from now.
More mature competitor Starbucks trades at 3x trailing sales, as of this writing. If Dutch Bros stock traded at that valuation, it could have a market capitalization of over $12 billion -- roughly a sixfold jump from its valuation today. That would almost certainly be a market-beating performance.
The challenges Dutch Bros must overcome
I don't believe the next decade will be as easy for Dutch Bros as its previous decade. Other small regional drive-thru coffee chains have growth aspirations, too. Moreover, even big players are developing growth plans of their own.
For example, Starbucks intends to grow from around 16,300 locations in the U.S. to about 20,000 in the coming years. A big part of its plan includes opening drive-thru-only locations, to add convenience for its customers. This is something to watch, considering Starbucks has 75 million loyalty members worldwide.
Additionally, investors can't overlook McDonald's and its new concept CosMc's. This recently launched concept is a beverage-centric chain optimized for drive-thru. If tests are successful, it could expand quickly because McDonald's uses a franchised model and has existing relationships with franchisees. In short order, eager McDonald's franchisees could snap up territories and start building out CosMc's.
Starbucks and McDonald's don't necessarily threaten Dutch Bros' existing business today. But they could make it harder to expand at a fast pace a few years down the road.
It's not an insurmountable challenge. And Dutch Bros has fans and strengths of its own. Investors just can't take its future success for granted.
The verdict on Dutch Bros
Dutch Bros stock trades at almost its lowest valuation since going public, which has lowered its risk profile. The company is in a strong financial position and has big growth plans, which should boost the stock price over time.
I'm not convinced Dutch Bros is necessarily a market-beating investment idea over the long haul -- competition may make it harder to earn the level of profitability it's hoping for. But the stock price should be higher in 10 years, and the downside risk could be limited.
That's not a terrible proposition for those who have been intently watching Dutch Bros stock from the sidelines. Now could be a chance to take a smaller position, understanding the competitive risks ahead. And investors could add to their positions as the stock either gets cheaper or better demonstrates its ability to outcompete its deeper-pocketed rivals in coming years.
