Market Commentary: Is This Stock The Next Starbucks?

Imagine your job is to grow Starbucks. You’ve got your work cut out for you launching hundreds of store locations each year in prime locations. Market research, consumer trends, cost of real estate, these are just a few of the factors you’ll need to analyze before building out the stores, and then you’ve got all the challenges of hiring baristas, setting up utility bill payments and supply chain logistics to establish for each store. It’s no mean feat.

Starbucks has a long history and a proven playbook, though, and figured out how to launch internationally too, which comes with a whole set of other problems from language to regulation, currencies to local bank accounts. Soon you can see it becomes a veritable nightmare to grow quickly.

Now apply all those same challenges to an up-and-comer who is struggling to establish their own processes and compete with the more efficient gorilla of the coffee industry, and you’ll see how daunting the task is facing the growth team at Dutch Bros, a coffee chain originally founded in Oregon.

In spite of all the headaches and hurdles, Dutch Bros has, in fact, just reported a stellar quarter with quarterly revenues up 33%, so is this new coffee company the next Starbucks?

Key Points

• Despite being smaller than Starbucks, Dutch Bros has achieved a 33% revenue increase in its latest quarter, indicating successful growth amidst industry challenges.
• It has shown substantial growth in revenue, operating income, and earnings per share over three years. A significant increase in cash reserves supports their ambitious expansion of 150 new stores.
• While share price growth has been modest compared to the S&P 500, analyst optimism suggests a brighter future.

Why Coffee Is Good Business

Three years ago, Dutch Bros reported $89.9 million in quarterly revenues. Fast forward to the most recent quarterly report and that figure has grown to $264.5 million.

Of the last 12 quarters, the most recent one enjoyed the highest operating income of $24 million, suggesting that management is figuring out not only how to grow but also to do so profitably and more efficiently. Earnings per share has also been steadily on the rise over the past three years.

Prior to this quarter it was somewhat challenging for investors to get too excited about the possible speed of expansion because the company had just $20 million or thereabout of cash on its balance sheet.

Compare that with Starbucks which enjoys $3.55 billion in cash reserves and you’ll see why the competition between the two is very much a David and Goliath battle at this stage.

Nonetheless, the most recent quarter saw a serious uptick in cash to $149 million, a figure substantial enough to ignite faster growth – 150 store locations are forecast for this year.

Is Dutch Bros Worth a Sip?

While the top line is growing fast and the balance sheet is increasingly looking more robust, the stock hasn’t exactly stunned this year, rising by just 6.2% for the year, an underwhelming performance relative to the S&P 500, which is up almost 3x that amount.

Analysts are upbeat about the stock’s potential, though, and have placed a $32.92 per share target on the stock which translates to 13.4% upside potential.

With that said, technically, the stock appears to be in overbought territory, though that shouldn’t stop any caffeine-loving investors from adding Dutch Bros to a watchlist.

The company’s high P/E ratio of 886x now is also reason to be skeptical of buying at this time. A pullback, however, could be an opportune time to pick up a stock that is worth just $2.1 billion and has a 5.7x price-to-sales ratio growing the top line by 34.9% over the past twelve months and 39.3% in the prior equivalent period. If that pace of growth continues, Dutch Bros would arguably be on sale soon, and especially so on a pullback.