Dutch Bros (BROS 3.00%) is getting a lot of attention these days. And it makes sense why. While shares are down 45% from their peak (as of June 27), they have skyrocketed 79% in the past nine months -- a strong momentum that has continued throughout 2024.
This might come as a shock, but I think investors are better off forgetting about Dutch Bros. There's another magnificent coffee stock that should be purchased instead.
The bullishness surrounding Dutch Bros
NYSE: BROS
Key Data Points
Investors were certainly pleased when Dutch Bros reported its Q1 2024 financial results in early May. Revenue was up 39% year over year, with same-store sales rising an impressive 10%. The business also reported $25.6 million in operating income, much better than the $232,000 loss in the year-ago period. All signs point to a company that is experiencing robust consumer demand resulting in strong financial results.
Dutch Bros' market cap sits at $6.5 billion right now. But the company's most bullish supporters think this figure will be multiples higher in the future.
That's because the growth prospects are very promising. The key to Dutch Bros' strategy is aggressively opening new stores. After opening 159 new locations in 2023 and 45 in the first three months this year, the total sits at 876. Executives believe that over the next 10 to 15 years, Dutch Bros' footprint could get to 4,000 stores.
That huge potential is precisely what investors are excited about. Should the business get even remotely close to that figure, revenue will be significantly higher.
The market loves a good growth story. Dutch Bros stock trades at a nosebleed forward price-to-earnings (P/E) ratio of 113.5. To me, this more than fully reflects the optimism surrounding the company.
The bearishness surrounding Starbucks
NASDAQ: SBUX
Key Data Points
But Dutch Bros' long-term success is far from guaranteed. And the current valuation leaves zero room for error. I'd rather not take that bet.
Instead, I think it's a smarter idea to consider buying shares in Starbucks (SBUX +0.74%). The stock is off 37% from its peak, and it now trades at a very reasonable forward P/E multiple of 22.1.
With Dutch Bros, investors have to worry about execution risk. Any executive team can throw out a lofty store target. However, the intensely competitive nature of the restaurant sector means Dutch Bros will have a challenging time reaching its goal.
On the other hand, Starbucks already dominates the industry, with its 16,600 stores in the U.S. and 38,951 in total worldwide. The only knock investors can have is that the business is hitting a rough patch, as same-store sales declined 4% in the fiscal 2024 second quarter (ended March 31). In a difficult macro environment, consumers might be shying away from paying up for Starbucks' beverages.
Nonetheless, the company has a powerful brand, a competitive moat that Dutch Bros doesn't hold a candle to. This has historically given Starbucks tremendous consumer mindshare and pricing power, not to mention helping the business develop a top-notch tech foundation and loyalty program.
The struggles could continue for the foreseeable future, but I expect Starbucks to eventually get back to posting healthy same-store sales and earnings growth. This view is supported by the company's expansion potential.
Management plans to open 3,400 new stores in the U.S. over the long term. This is roughly the same number that Dutch Bros wants to open. This means that Dutch Bros will likely have to compete head-to-head with Starbucks when finding attractive real estate or hiring talented employees. The Seattle-based chain has significantly greater scale and financial resources to execute its growth strategy better than its smaller rival.
And this makes it the smarter stock to buy, in my opinion.
