Analysis

1 Growth Stock Down 54% to Buy Right Now

A caffeine-fueled rally may have finally begun in this stock.

At first glance, Dutch Bros (BROS -1.66%) may look like a stock investors are better off ignoring. Starbucks has saturated Dutch Bros’ only current market, the U.S. With competition from private chains like Dunkin’ or Scooters and independent coffee shops, Dutch Bros might also seem to struggle to gain footholds in its markets.

However, it might surprise some investors that Zion Market Research expects the global coffee shop market to grow at a 7% compound annual growth rate through 2030. The market also seems to have taken to Dutch Bros’ espresso-based Dutch Classics, energy drinks, and other beverages, indicating that it has become a more notable competitor. Given the state of the stock, this situation could translate into stock gains, and here’s how.

So, what happened to the stock?

The question of what happened to Dutch Bros is probably more a question of timing rather than performance.

The stock launched its IPO in September 2021, near the height of the bull market for that year. While some fortunate insiders could buy the stock for $23 per share, it did not trade below $40.50 per share on its IPO day. Within six weeks, it briefly breached the $81 per share price in intraday trading.

From that point, it faced a brutal bear market that would return Dutch Bros to its original IPO price in November 2023. It has recovered to the mid-$30s per share level as of the time of this writing, a level which could signify a new bull market in this stock.

The company is rapidly growing its shop count. As of the end of the first quarter of 2024, the shop count increased by 160 locations to 876, a 22% increase in just one year.

The company has also set a goal of opening more than 4,000 shops. Since Dutch Bros is only in 17 states, its caffeine high could continue for years without opening shops outside of the U.S.

Dutch Bros’ espresso-fueled financials

Indeed, Dutch Bros’ strategy has driven increases that should catch the attention of growth investors. In Q1 2024, revenue of $275 million surged 39% higher than year-ago levels.

Even better, not all of the increase was expansion, since same-shop sales growth was 10%. This also exceeded the 31% revenue increase and a 3% rise in same-shop sales for 2023, showing a considerable degree of improvement.

Amid that growth, Dutch Bros generated $7 million in net income attributable to the company, above the $4 million loss in the year-ago quarter.

With that boost, the revenue outlook for 2024 was revised above $1.2 billion at the midpoint, indicating that the improved performance will probably last more than one quarter.

Moreover, even with the stock up 25% over the last year, this is likely the early stages of a recovery. Although profits are still too low to yield a meaningful price-to-earnings (P/E) ratio, the 2.5 price-to-sales (P/S) ratio is the same as the Starbucks sales multiple.

Since Starbucks is close to saturation in the U.S., it will struggle to grow as fast as Dutch Bros on a percentage basis, likely meaning Dutch Bros will offer investors faster growth at a lower cost.

Buy Dutch Bros stock

Coffee stock investors seem to have a unique opportunity in Dutch Bros stock. Indeed, the company operates in a competitive environment, and the stock has fallen far from its highs in 2021.

However, rapid growth shows it can prosper despite competition, and its room for expansion in the U.S. alone could mean the stock will grow faster than that of Starbucks despite a similar valuation. As Dutch Bros continues expanding its footprint and its sales levels within its current markets, the stock holds tremendous potential to return to and surpass its record highs.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.

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