Thanks to its fun and customer-focused culture, customizable drinks, and drive-through focus, Dutch Bros (BROS -1.12%) has caught on with consumers. But the stock hasn't been able to fire up investors' portfolios.
As of this writing, shares currently sit 58% below their peak price (as of April 5), which was set in November 2021 at the tail end of that bull market. But they have climbed 35% just in the last six months, perhaps indicating improving investor sentiment.
Does this coffee stock have the ingredients to become a millionaire maker for you one day?
Investors love the growth potential
Dutch Bros operates in an otherwise boring industry. It's not involved in cryptocurrencies or cybersecurity or anything related to artificial intelligence. Those types of companies attract investors looking to cash in on explosive growth.
However, Dutch Bros has still caught the attention of investors who want the potential for huge gains. That's because this small coffeehouse chain has big plans. The business currently has 831 stores, a figure that expanded by 24% from just 12 months prior. This growth happened despite higher interest rates and an uncertain economic environment.
That's not all, though. Investors are excited about Dutch Bros' long-term potential. Management has set an ambitious target to reach 4,000 locations one day. That translates into a roughly fivefold expansion when compared to the current footprint.
I can understand why the leadership team is so focused on opening new locations. The average company-operated store generates $1.9 million in annual sales and boasts a shop-level contribution margin (excluding corporate overhead costs) of 28.2%. These look like solid unit economics.
The road won't be easy
Any management team can throw a big growth figure out there to drum up interest from Wall Street. Astute investors will try to gauge if it's even a possible outcome. For Dutch Bros, I believe hitting 4,000 stores is far from certain.
I think this because of just how competitive the retail coffee sector is. There are a massive number of independent coffee shops scattered across the country that have a strong presence in their communities. And then there are the big boys -- like Starbucks, McDonald's, and Dunkin' Donuts -- that have nationwide marketing reach.
Just on a nominal basis, Starbucks, which is the clear leader in the industry, is planning to open about the same number of stores in the U.S. over the long term as Dutch Bros. This means that there will be intense competition not just when it comes to serving customers, but also for acquiring favorable real estate to build new locations.
It's accurate to say that Dutch Bros will have its work cut out for it. The road to get to 4,000 stores will be an extremely difficult path.
Is it a millionaire-maker stock?
On the surface, Dutch Bros looks like a stock that has the attributes that could turn its shareholders into millionaires down the line. The executive team is fully focused on growth. And as the business scales up and generates more revenue, profitability should get a boost. These positive factors could lead to a soaring share price.
However, investors need to gauge the probability of this type of outcome occurring -- namely, that Dutch Bros can get to 4,000 stores in the U.S. one day. To be clear, I think the odds are stacked against the company. There is simply way too much competition in the industry, as well as heightened uncertainty as to how this will play out over the very long term.
If you're still bullish on Dutch Bros' prospects, increasing your initial capital outlay and extending your time horizon could raise the chances of getting to a million-dollar position. But I'm not a buyer of the stock right now.
