Dutch Bros (BROS 0.35%) was energizing investor portfolios — for a short period of time. From its 52-week low to its 52-week high, shares of the coffeehouse chain soared 224%. General market sentiment toward the business was clearly trending in the right direction.
In the past couple of months, it’s been a completely different story. This coffee stock is selling off, down 32% from its peak (as of April 18), which was established in February. Investors seem worried that economic weakness is on the horizon.
Maybe now is the time to be opportunistic. Is it a smart idea to buy Dutch Bros on the dip?
Dutch Bros is a growth story
Dutch Bros is finding success thanks to its fun culture, customizable menu, and friendly staff. It has been opening new stores at a blistering pace. The company reached 1,000 locations in February. That figure has doubled since Sept. 30, 2021.
The leadership team is extremely optimistic that Dutch Bros is just getting started. Previously, executives targeted 4,000 stores to be open in 10 to 15 years. At a recent investor day conference, they upped that goal. The company has its sights on 7,000 stores as its total addressable market.
Same-store sales were up 6.8% in 2024, which is a positive trend highlighting improving volume from existing locations. The rewards program is successful, driving 71% of transactions. And there is potential to make more money from food, which currently represents less than 2% of revenue, as the initiative is expanded across the country.
Consider the bear case
It’s not hard to understand why investors might be drawn to Dutch Bros: The market loves a good growth story. However, research from McKinsey & Company shows that high growth rates aren’t sustainable.
Investors shouldn’t believe that Dutch Bros will automatically get to 7,000 stores one day. That’s undoubtedly an ambitious goal. And there is a lot that can happen between now and then. Internally, management could make strategic mistakes that derail plans. It might focus on rapid expansion at the expense of properly training employees, investing to build an adequate supply chain, or taking the time to select proper locations for new stores.
Externally, competition is perhaps the most important factor investors should consider. Although its same-store sales have fallen in four straight quarters, Starbucks remains the undisputed leader in the retail coffee industry. That’s because it has an economic moat, supported by its brand presence and cost advantage.
At 1,000 stores, I don’t think investors can confidently say that Dutch Bros has a moat yet. The positive view is that it’s still early on its journey and that durable competitive advantages will be developed. It’s important to pay close attention to the operating margin, as well as return on invested capital, to ensure the business is making progress here.
Tariffs introduce another possible headwind. Costs for the company’s key inputs, like coffee and paper products, could rise, leading to potential margin pressure. It’s yet to be determined if Dutch Bros can successfully navigate the headwind.
Still trading at a lofty valuation
Dutch Bros shares might be tanking amid the overall market’s turmoil and weaker investor sentiment. However, this doesn’t mean the shares are cheap. It’s still quite the opposite.
As of this writing, the stock trades at a price-to-sales ratio of 4.7. This is 52% more expensive than the historical average.
If you’re an investor who wants to take on more risk in a part of your portfolio, then Dutch Bros stock could be attractive, particularly while’s its 32% off its record high. The dip can be hard to ignore.
I’m not yet convinced the business has staying power. And this poses a big risk, in my opinion. I’m not buying amid Dutch Bros stock sell-off.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
