Is there a caffeine-fueled gem hiding in plain sight? Find out what makes this upstart beverage exciting for customers and investors.
Drive-thru coffee chain Dutch Bros (BROS 1.53%) it has been a shaky investment so far. But the company is already profitable and growing like wildfire. Let me show you why Dutch Bros could be a great stock to buy now and hold for the long haul, despite its high valuation ratios.
Dutch Bros. vs. Starbucks
At first glance, Dutch Bros looks like a rebranded version of Starbucks (SBUX 0.31%). The menu focuses on coffee drinks with add-ins like pumpkin spice or Irish cream. Like Starbucks, the company also offers some lighter snacks and drinks, from lemonade and iced tea to frappucinos (“freeze blended” in the Dutch Bros lexicon) or hot cocoa. So far, there is almost no difference in sight.
But the two companies become more different the more you look.
First of all, Dutch Bros is all about the drive-thru window. Most of their restaurants don’t even have indoor seating, focusing only on the in-car experience.
In turn, that experience is friendlier and more upbeat than most coffee shops. Dutch Bros marketing radiates youth and high energy, built around social media messaging. And when you order your drink, the staff will follow with the same ultra-friendly approach.
And the youthful attitude continues in the menu as well. Starbucks sells many variants of sugar-laden coffee, but Dutch Bros takes it to the next level. Some customers see the popular Dutch Bros products more like a dessert than a coffee drink. It also makes its own energy drink, with or without boba balls in at least 37 flavors.
This is a diversity of coffee culture, and it is incredibly popular. Drive-thru lines often spiral down the street, like Chick-fil-A does in my neck of the Florida swamps. High power service is almost a necessity for managing these long lines. End revenue grew 65% higher in two years. The number of places increased from 603 to 912 in the same period.
It’s the kind of high-octane growth story that inspires investor enthusiasm and sky-high valuation ratios.
Market valuation and investment potential
Dutch Bros entered the public stock market in the fall of 2021, a few weeks before the inflation panic. The stock rose as high as $76.25 per share in the first few days, but sank quickly as investors turned away from risky growth stocks. Today, Dutch Bros shares are 58% below the 2021 peak.
It’s also not a cheap stock by traditional value metrics. Shares are changing hands at 129 times trailing earnings — more than enough to make value investors look elsewhere.
But Dutch Bros looks more affordable in a different light. That includes the price to earnings to the growth ratio, of course, which was done to weigh the value of high-growth companies. A ratio close to 1.0 usually indicates fair value, and very low figures indicate fire sales. The value of Dutch Bros remains at 0.64.
But that’s not all. The stock is also trading at just 15 times operating cash flows. That’s lower than Starbucks at 19 times operating cash flows. Strong cash flows mean a high-quality management team that knows how to make a cash profit, and the low multiple suggests that investors haven’t picked up on this investor-friendly quality yet.
Where do I sign up for this low-priced growth stock?
Dutch Bros is getting this strong growth and solid profit while Starbucks recently named a superstar CEO to start a turnaround. There is something special in this company’s business recipe, and the stock seems really undervalued in many ways.
Whether you’re into their caffeinated beverages or not, Dutch Bros could be a great stock to own as the company expands its market. Dutch Bros has opened shop in 18 states so far, leaving plenty of map space for future exploration.
Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.