With the broader economy characterized by uncertainty, investors might be hesitant to put money to work in consumer discretionary stocks. If there's a recession looming, then spending could take a hit. And businesses that bank on this would be devastated.
That kind of thinking makes sense. But it doesn't necessarily mean we should stop looking to invest in these types of companies, particularly if there are compelling reasons.
Dutch Bros (BROS 5.40%) and Starbucks (SBUX +0.91%) might have caught your eye as potential long-term investments despite macro headwinds. But there can only be one that's the smarter portfolio addition. Which of these coffee stocks is the better buy right now?
Betting on huge growth
NYSE: BROS
Key Data Points
Benefiting from a heightened interest from consumers for increased accessibility and convenience, Dutch Bros is finding notable success. It operates 831 coffee shops across the country that sell customizable beverages in a fun atmosphere.
Growth has been the key theme for this business. Dutch Bros increased revenue by 31% in 2023, driven by the rapid opening of new stores. The current store count is 88% higher than it was just three years ago.
But management, led by former Starbucks executive Christine Barone, who is the current CEO, believes that the business is just getting started. It has set a lofty goal of getting to 4,000 stores one day. This translates to a 380% expansion of the existing store base.
Even though the stock sits 62% below its peak price from November 2021, investors appear to have sky-high expectations about the future of Dutch Bros. Shares trade at a forward price-to-earnings (P/E) ratio of 92 -- not cheap by any stretch of the imagination.
But the hope is that as this business scales up over time, profitability will expand significantly. Progress is already being made on this front, as net income in 2023 of $10 million was a major turnaround compared to the $19 million loss in the year before.
Already a dominant player
NASDAQ: SBUX
Key Data Points
With its 38,587 stores all over the world, Starbucks is a giant in the industry, especially compared to Dutch Bros. The king of retail coffee has been dominating for decades. And it produced $36 billion of revenue last fiscal year, up 12% year over year.
As a globally scaled player, Starbucks benefits from a powerful and widely recognized brand. Any consumer-facing business strives to achieve this level of broad appeal. The brand creates the company's economic moat, and it allows Starbucks to charge premium prices.
This results in consistent profitability. In the last 10 years, operating margins have averaged 14.9%, an impressive level of bottom-line performance that Dutch Bros can only dream of achieving one day.
As of this writing, Starbucks shares are 26% off their all-time high. They trade at a forward P/E of 23, about the cheapest in the last couple of years.
The valuation looks more attractive when you consider the company's growth prospects. Management believes there can be 55,000 stores open by 2030. Further penetrating the Chinese market to tap into a massive consumer base is a focal point, but opening new locations in the U.S. is also a priority.
There are certainly investors out there who are intrigued by Dutch Bros' huge potential, but it's far from becoming a reality. There is a lot of uncertainty on the way toward successful execution of its expansion plans, and this adds tremendous risk to the equation.
In my opinion, Starbucks is the clear winner in terms of what stock to buy. It has long dominated its industry. And given its focus on growth and innovation, this isn't going to change anytime soon.
