Will 2024 be the year Dutch Bros (BROS -1.04%) stock finally takes off? The drive-thru coffee chain went public in 2021, jumped 108% within about a month, and promptly plunged. It's now nearly 60% off its highs.
There has been a mix of factors leading to the poor stock performance, and there are plenty of reasons to envision it becoming a star stock. Here's why things could turn around in 2024.
Not your average coffee shop
Starbucks has changed the way people consume their morning coffee, making it an all-day event and a reason to gather. The company is undergoing its own transformation right now, but it has paved the way for other chains to leverage the trend and create a differentiated coffee shop culture. That's the theory behind Dutch Bros.
Dutch Bros has a friendly, customer-oriented culture with a focus on quality service and speedy preparation. Its beverages aren't essentially different than those from other coffee shops, but they come with their own spin and interesting names like Double Torture and Annihilator. They also offer cold drinks.
The company has made a name for itself in the markets it serves, which as of the end of the third quarter include 16 states in the Western and Southern United States. It operates 794 stores, most of which are company-owned, but about a third of which are franchised, and it sees the opportunity for 4,000 stores over the next eight years or so.
That itself will be a robust revenue driver. Dutch Bros has reported solid double-digit sales growth since it went public, and most of that is coming from new stores. It opened 39 locations in the third quarter, with plans for 150 total for the year.
In that way, it looks like a no-brainer stock to buy right now. In eight years, when it could own several thousand stores, revenue will be exponentially higher than it is today, and that will lead to stock growth.
So why has Dutch Bros stock plunged so far off its highs?
It's still becoming a viable company
Everyone knows the statistics about how many small businesses fail. According to the Bureau of Labor Statistics, 20% of small businesses fail in their first year, and only 33% remain by their 10th year. Even fabulous business ideas won't make it if they're not shepherded to the finish line with competent management and efficient operations.
Dutch Bros has a lot going for it, but it's facing strong headwinds due to inflation. It's a young start-up with a bright future, but it's untested in this challenging economy. Starbucks has a long history of experience and the resources and sheer size to withstand these times, but Dutch Bros is still trying to make a go of it. That leads to high pressure -- and, for confident investors, incredible opportunity.
One place Dutch Bros is having trouble is in growing its comparable-store sales (comps). This is an important metric for retailers and restaurants because it demonstrates how happy customers are and if they're returning. That speaks to the long-term viability of the business.
It also leads to expanding margins since many of the expenses of running a restaurant are fixed, and each sale, or higher sale, leads to more-efficient use of fixed costs and higher profits.
Image source: Dutch Bros.
Dutch Bros recently announced that its founder and leader is handing over the reins to an experienced food executive. That creates some uncertainty as it transitions, but it ultimately looks like the right move to bring the company to the next level.
As inflation eases, customers might be able to spend more money on little luxuries like a custom-made beverage, and that should result in accelerating comps growth in 2024.
Risk vs. reward
At the current price, Dutch Bros stock trades at a price-to-sales ratio of just under 2. That's a reasonable valuation for a company with its growth rate. As it continues to post high growth and positive net income, it looks more likely to rebound and become a stable, expanding business.
However, it's not without risk. Dutch Bros could be a standout stock in 2024, but risk-averse investors should wait for more sustained profitability and comps growth.
