Amid the North American saturation of Starbucks locations and the possible move of McDonald's into the beverage market with CosMc's, investors might have little interest in Dutch Bros (BROS -1.04%) stock. Indeed, the upstart coffee chain faces heavy competition, and its stock price has shown few signs of recovery from the 2022 bear market.
Nonetheless, Dutch Bros continues to grow despite the headwinds. Also, when considering three of the companies' attributes, investors could take more of an interest.
1. Market positioning
The best reason to buy Dutch Bros stock right now is its fortuitous position in the market. Admittedly, many investors may not see it that way due to the competition, and its peers are not just Starbucks and CosMc's. Numerous independents and small chains continue to succeed in this business.
However, Dutch Bros is in the midst of a regional-to-national expansion, a factor that served Starbucks shareholders well in the 1990s. As of the end of 2023, Dutch Bros spanned 16 states and over 831 shops, a nearly 24% increase in the number of locations in just one year.
Even though same-shop sales rose by only 3%, the company's revenue increased by 31% during the same period to $966 million. Also, its pace of expansion is unlikely to slow anytime soon. The company expects to add at least 150 shops in 2024, meaning massive revenue growth is likely, even if same-shop sales stay in the low single digits. That could serve as a catalyst that will finally help Dutch Bros recover from the previous bear market.
When considering the company's potential to expand to the other 34 states (and possibly beyond), Dutch Bros could maintain this growth pace for years.
2. Profitability
Additionally, the rise in revenue led to a milestone Dutch Bros had not previously experienced as a public company -- profitability.
To be sure, its net income in 2023 was modest, just $1.7 million. Moreover, it came thanks to positive net income in the second and third quarters. In those quarters, limiting the increases in the cost of goods sold and selling, general, and administrative expenses allowed for enough operating income to turn profitable.
Still, continued growth in revenue should increase profit growth. More importantly, a positive income means Dutch Bros can devote profits and any outside funding to expansion. This is critical because the number of outstanding shares rose from 58 million in the middle of last year to more than 81 million today, a level of increase that makes share price growth difficult.
Nonetheless, since the company paid off a $203 million line of credit in the second half of 2023, its remaining total debt of about $99 million is only about 15% of its $676 million in total equity. That could mean it turns to debt rather than issuing new shares to fund its expansion.
3. Valuation
Furthermore, share prices have not recovered from the 2022 bear market. Admittedly, fears about rising prices and a slumping economy may have cooled investors to Dutch Bros. However, the company was losing money at that time and had a smaller store footprint.
Also, the price-to-sales (P/S) ratio has dropped below 1.9. In comparison, Starbucks sells for around 2.9 times sales. Additionally, the average P/S ratio for the S&P 500 is about 2.8, a metric that factors many value stocks into the mix. This could indicate Dutch Bros stock is undervalued as it is clearly a growth stock.
BROS PS Ratio data by YCharts
Consider Dutch Bros
Amid intense competition, Dutch Bros continues to stand out among coffee stocks. The company continues to benefit from a regional-to-national expansion, a trend that benefited Starbucks and other retail businesses before it. Moreover, Dutch Bros is on track to continue its rapid growth after recently achieving profitability.
Indeed, the company needs to significantly slow the growth of outstanding shares. But with the stock still trading at a significant discount, investors may want to consider buying before others begin to wake up to Dutch Bros' potential.
