Do you like to buy promising stocks when they go on sale? Then buy shares of up-and-coming coffee chain Dutch Bros (BROS -1.04%). It's down 56% from its 2021 peak, but it may also be on the mend and en route to higher highs. Investors are starting to believe the incredible growth of its recent past can and will be sustained for the foreseeable future.
But, first things first.
The Dutch Bros story
If you're not familiar with the company, Dutch Bros operates 830 drive-thru coffee stands in 16 states, and did $254 million worth of business during 2023's fourth quarter.
There's no denying it's a crowded arena, with bigger direct competitors like Starbucks (SBUX 0.47%) and indirect competitors like McDonald's (MCD -0.91%) already having locations seemingly everywhere Dutch Bros might want to open a store.
This smaller company has an edge, though -- its ability to deliver a much more personalized experience to its patrons. It's not unusual for Dutch Bros' employees to know their regular customers by name, nor is it unusual for stores to support local, community-minded organizations. Customers will even occasionally find workers fundraising for particular employees in need. The company says it aims to foster a "people-first culture" that makes a "massive difference in the lives of our employees, customers and communities."
Image source: Getty Images.
The numbers confirm this approach works. Last quarter's top line was up 26% year over year, partially driven by same-store sales growth of 5%, but more so driven by new store openings. A year ago, there were only 671 Dutch Bros locations. It has been growing at this pace for a few years now, and the company's management team says more of the same is in store for 2024. The analyst community, meanwhile, anticipates that the company will maintain its current growth pace at least through 2028.
Although it's a long-term goal, Dutch Bros expects to eventually operate around 4,000 stores. That's a lofty goal, to be sure, but it's not an outrageous one.
And by the way, Dutch Bros is profitable. That's not something every company of its age, size, and category can say.
This coffee drive-thru chain's competitive edge
Starbucks raised the bar on consumers' coffee-drinking experiences, while chains like Dunkin Donuts and McDonald's still offer them great value and convenience. Don't dismiss the advantages of being small, though -- although for Dutch Bros, the upsides might not relate entirely to the obvious reasons you might expect.
Yes, in an era where faceless digital apps facilitate consumers' purchases and friendly customer service has become the exception to the rule, Dutch Bros' personality distinguishes the company.
That's not the entirety of its competitive edge, however. Arguably just as important is how consumers are changing as time marches on. Younger people prefer to patronize more authentic organizations, and will even make a point of steering clear of massive, clearly corporatized entities like McDonald's and Starbucks.
Then there's the even-less-measurable nuance working in Dutch Bros' favor -- its coffee stands aren't made "uncool" by virtue of being the go-to coffee purveyors for the parents of the under-40 crowd. Founded in the early 1990s and only just starting to become big enough to notice, the Dutch Bros brand is something unique to Gen Zers and millennials.
Given that younger adults will continue to grow their disposable and discretionary incomes, look for them to support Dutch Bros' growth by becoming and remaining customers as it expands.
The dust is finally settling
This backstory begs the question: If the company's future is so bright, why is Dutch Bros stock down nearly 60% from the all-time high it hit in 2021?
The answer relates in part to the circumstances and timing of the company's initial public offering.
Although Dutch Bros has been around since the 1990s, it has only been publicly traded since September 2021. The COVID-19 pandemic was still in its public health crisis phase then. Yet it was also a time when the stock market was on a bullish run because the world had found ways to conduct business despite the pandemic. And, as large numbers of people were still maintaining their social distancing efforts, which kept them from enjoying some of their other preferred activities, some turned to the stock market as a form of entertainment. Investors hungry for exciting new investment prospects piled into the newly issued Dutch Bros shares, catapulting them from their IPO price of $23 to their November 2021 peak of $81.40.
As is so often the case, however, the euphoria waned -- and not just for Dutch Bros. Amid the bear market of 2022, the stock sank.
However, the same pendulum that previously swung too far in a bullish direction has now swung too far -- and for too long -- in a bearish direction. The sellers overshot. Dutch Bros stock is now undervalued largely because the company itself is being underestimated. This isn't an uncommon post-IPO phenomenon either.
That being said, shares are now up by 40% from the 2024 low they touched in February, and up more than 50% from October's all-time low. The stock hit a new 52-week high just this month -- a subtle sign that the market is starting to think it made a mistake in sending the stock down to the degree it did.
Is Dutch Bros stock right for you?
While this growth story is fun to read, it doesn't inherently make Dutch Bros the right kind of stock for every investor's portfolio. It is still, in many ways, a start-up. It's spending heavily on growth and will continue doing so. Moreover, at the start of March, it issued 8 million new shares at a price of $29.05 per share, pushing the total number of outstanding shares up to a little over 70 million -- and diluting existing shareholders in the process. These factors bolster the volatility for shares of a company with a compelling but unpredictable future.
If you can stomach the above-average risk and volatility, though, Dutch Bros certainly offers the potential for above-average rewards.
