The market was getting iffy about Dutch Bros (BROS +3.44%) stock a few years ago when comparable sales (comps) were under pressure, but as it continues to demonstrate strong performance, with improving comps and pretty much everything else, it's come roaring back. Dutch Bros stock is up 134% over the past year, and the future looks bright. Let's see where it might be in a year from now and whether it makes sense to buy it.
A carefully curated vision
Dutch Bros has grown from a small, regional chain of coffee shops to operate 950 stores in 18 states. There are a number of ways it has distinguished itself from other stores and chains to get to this point, and it still sees a huge opportunity ahead.
One factor is its branding, which it continues to rigorously fine-tune. It has a down-to-earth feel, very much the opposite of Starbucks' sophisticated, premium vibe, and it's focused on community-building, speed, and service. Since all these chains sell coffee, the branding is a serious component of how it sets itself apart, creates loyalty, and expands its business. It's infused into all of its operations, from its custom-crafted beverages to how it lays out its stores. For example, it recently restructured its real estate criteria as it onboards new locations and learns what's working. Although it's known primarily for its drive-thru locations, some stores have dining areas, and many have walk-up windows. Some stores have double drive-thrus, and it's also testing double walk-up windows. Whatever it decides is the right structure for each location, it has a team that develops it and trains the staff to deliver the carefully curated Dutch Bros model.
The next big coffee chain
The founders recognized an opportunity to expand several years ago when it went public. They also recognized the need for more experienced hands to bring the vision forward. The founder and CEO moved into the chairman role recently to onboard a seasoned expert who could take the model and replicate it all over the country successfully. So far, so good.
Dutch Bros opened about 150 stores in 2024, and it's planning to accelerate openings in 2025. New stores drive higher revenue, especially right now when customers in general are being more careful about spending, and comps growth has been lower. Revenue increased 28% year over year in the third quarter, and comps were up 2.7%. Although it's still in growth mode, it has turned a corner on profitability, and net income increased from $13.4 million to $21.7 million in the quarter. We'll hear about its fourth-quarter progress when it reports on Feb. 12.
NYSE: BROS
Key Data Points
I would expect it to continue opening new stores at a fast pace, generating higher revenue and profits over the next year. There could be some more hiccups in its real estate strategy, as there were in 2024. That's one of the risks of investing in a young company. The flip side is the growth that comes with it. In Dutch Bros' case, the growth opportunities look like they outweigh the risks of making mistakes along its path. In one year, it should still be in high growth mode. And if inflation continues to taper off and interest rates come down further, it could be in even better shape than it is right now.
Is now the time to buy?
The biggest risk with Dutch Bros stock over the next year has little to do with its business. With its incredible gains over the past year, Dutch Bros stock has become extremely expensive. It trades at a forward one-year price-to-earnings (P/E) ratio of 89. There's a lot of growth built into that valuation.
So even though I expect the business to improve over the next year and to have more stores, higher revenue, and increasing profits, I'm not confident that the stock can go much higher over the next year.
Wall Street agrees with me. The average Wall Street price target is 13% below today's price, and the high is only 4% higher than the current stock price. I don't always recommend relying on what Wall Street is thinking, but I can appreciate their consensus when I have reached the same conclusion myself.
At the same time, 85% of covering analysts call Dutch Bros stock a buy, and zero are in the sell camp. The business looks very healthy, and you can't ignore its long-term opportunities. I am a huge fan of Dutch Bros stock, and if you're planning to hold for at least five years, if not longer, you can buy at this price. But it is starting to look bloated, and new investors may want to wait for a better entry point. If there's any unwelcome reports over the next year, the price could come down to more attractive levels.
