We're five months into 2024, and even businesses in the same industry have had wildly different performances for their investors. Shares of Dutch Bros (BROS 1.07%) have jumped 12% so far this year, while Starbucks (SBUX +0.59%) stock has tanked 16%.
There's a clear contrast in investor sentiment regarding these two companies. Between these two coffee stocks, which is the better one to buy right now?
NYSE: BROS
Key Data Points
Betting on huge growth
Dutch Bros has found success by primarily focusing on a drive-thru model that boosts customer accessibility and convenience. Management touts a fun-loving atmosphere that focuses on quality, speed, and service.
The key part of Dutch Bros' story is its rapidly expanding store base. The chain has 876 stores (as of March 31) that are mainly located in the Southern and Western U.S. That figure is up by 160 over the past 12 months alone.
However, the leadership team believes that the company can one day have at least 4,000 locations open across the country. It's anyone's guess when (or if) Dutch Bros will ever reach that ambitious target. But if that level of scale is achieved, there's no question that revenue will be astronomically higher than it is today.
And perhaps even more encouraging is that the business should be able to generate sizable earnings at that time, too. It shouldn't be surprising that because Dutch Bros is still entirely focused on scaling up its operations, profitability isn't a top priority today. After posting an operating loss of $2.6 million in 2022, the company reported operating income of $46.2 million last year, translating to a margin of just 4.8%.
Although Dutch Bros shares trade 54% below their peak price, they still reflect lofty expectations. The stock sells for a nosebleed forward price-to-earnings (P/E) ratio of 96. This leaves prospective investors with zero margin of safety.
NASDAQ: SBUX
Key Data Points
A struggling industry leader
Investors will always be enamored with a good growth story. However, I think Starbucks is the better stock to buy.
To be clear, the company is struggling right now. Same-store sales dipped 4% in the latest fiscal quarter (Q2 2024 ended March 31). But I believe this is the perfect example of a good business dealing with temporary issues. High inflation continues to pressure consumers, which isn't specific to Starbucks. Once economic conditions improve, Starbucks should get back on solid ground.
With 38,951 stores in total, Starbucks has some key advantages that Dutch Bros doesn't. For starters, this massive scale has made Starbucks one of the most recognizable brands on the planet. And that allows the coffee giant to charge premium prices, as well as boost customer loyalty.
The business is also better able to leverage its costs, which results in a healthy operating margin that Dutch Bros can only dream about. Starbucks' trailing-five-year average operating margin of 14.9% is triple that of its smaller rival.
And what's even more encouraging is the fact that Starbucks also possesses meaningful growth prospects. Executives have set a goal to have 55,000 stores open by the end of the decade. This includes sizable expansions in the U.S. and China.
Investors who buy Dutch Bros shares are essentially betting on that monster success to be achieved at some point far into the future. This adds tremendous uncertainty to the equation. Perhaps if the goal of 4,000 stores is met, then the stock can be a huge winner. But I'm not confident about this outcome, particularly given the intense competition in the industry.
At a forward P/E ratio of 22 -- which is a monumental discount to Dutch Bros -- Starbucks looks like the safer stock to buy. And once its financial performance improves, the shares are likely to reward investors who have the patience to think long-term.
