Dutch Brothers (NYSE:BROS) is getting a lot of attention these days. And it makes sense why. While stocks are down 45% from their peak (as of June 27), they have soared 79% over the past nine months – strong momentum that has continued throughout 2024.
This may seem shocking, but I think investors would be better off forgetting about Dutch Bros. There is another magnificent coffee broth this should be purchased instead.
Optimism around Dutch Bros
Investors were certainly delighted when Dutch Bros released its first quarter 2024 financial results in early May. Revenue grew 39% year over year, with same-store sales up an impressive 10%. The company also reported an operating profit of $25.6 million, much better than last year’s loss of $232,000. All signs point to a company experiencing strong consumer demand, which translates into strong financial results.
The market capitalization of Dutch Bros currently stands at $6.5 billion. But the company the most optimistic supporters I think this figure will be several times higher in the future.
The growth outlook is very promising. The key to Dutch Bros’ strategy is to open new stores aggressively. After opening 159 new stores in 2023 and 45 in the first three months of this year, the total stands at 876. Executives estimate that over the next 10 to 15 years, Dutch Bros’ presence could reach 4,000 stores.
This enormous potential is precisely what excites investors. If the company comes even remotely close to this figure, revenues will be significantly higher.
The market loves a good growth story. Dutch Bros shares are trading with a nosebleed forecast price/earnings ratio (PER) of 113.5. To me, this more than fully reflects the optimism surrounding the company.
The gloom around Starbucks
But Dutch Bros’ long-term success is far from guaranteed. And the current valuation leaves no room for error. I prefer not to take this gamble.
Instead, I think it’s a smarter idea to consider buying shares in Starbucks (NASDAQ:SBUX)The stock is down 37% from its peak and now trades at a very reasonable forward P/E multiple of 22.1.
With Dutch Bros, investors have to worry about execution risk. Any management team can afford to set an ambitious goal. However, the extremely competitive nature of the restaurant industry means that Dutch Bros will struggle to achieve its goal.
Starbucks, on the other hand, already dominates the industry, with 16,600 stores in the U.S. and 38,951 globally. The only criticism investors can make of the company is that it is going through a tough time, with comparable-store sales down 4% in the second quarter of fiscal 2024 (ended March 31). In a tough macroeconomic environment, consumers may be reluctant to pay more for Starbucks beverages.
However, the company has a powerful branda competitive advantage that Dutch Bros. can’t match. It has historically given Starbucks huge consumer market share and pricing power, not to mention helping the company develop a world-class technology base and loyalty program.
The challenges may continue for the foreseeable future, but I expect Starbucks to eventually return to posting healthy same-store sales and profit growth. This view is supported by the company’s expansion potential.
Management plans to open 3,400 new stores in the U.S. over the long term. That’s about the same number that Dutch Bros. wants to open. That means Dutch Bros. will likely have to compete with Starbucks for attractive locations or talented employees. The Seattle-based chain has significantly greater scale and financial resources to execute its growth strategy better than its smaller rival.
And that’s why it’s the smartest stock to buy, in my opinion.
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Neil Patel and its clients have no position in any of the stocks mentioned. The Motley Fool posts and recommends Starbucks. The Mad Motley has a disclosure policy.
Forget Dutch Bros: Consider This Magnificent Coffee Stock Instead was originally published by The Motley Fool
