Inflation has continued to rise this year, driving up prices on everything from gasoline to meals. Customers have continued to slash costs, and even discount retailers have been hit hard by belt-tightening consumers.
Coffee is the world’s most popular beverage, an everyday staple that some might consider immune to inflation. Coffee culture fueled the meteoric rise of Starbucks (NASDAQ: SBUX) from a Seattle coffee brewer to the second-largest fast-food chain in the world.
Starbucks built an empire that includes 38,000 stores worldwide and has a market capitalization of over $103 billion. But size can be a detriment if growth cools off. Global-scale operations can also create issues like the blowback Starbucks recently faced over its perceived stance on the Israel-Hamas conflict.
As an upstart challenger to the coffee crown, Dutch Bros (NYSE: BROS) doesn’t face those types of issues yet.
The Oregon-based company has around 830 stores, the majority of which are on the West Coast. With a market capitalization of $6.0 billion, Dutch Bros is focused on expanding its footprint and capturing market share.
So which is the better coffee stock between Dutch Bros and Starbucks?
Dutch Bros Growing Store Counts Fast
Dutch Bros reported a 26% year-over-year revenue increase in the 4th quarter of 2023. Touting itself as one of the fastest-growing US quick-service beverage brands by location count, the company also beat revenue expectations for the quarter by 0.48%.
A large part of that growth resulted from opening new stores, and Dutch Bros opened 37 new locations in Q4. Last year in total, the company opened 159 shops in 13 states. Management forecasts it will stay at that pace for 2024, opening between 150 and 165 new stores by year’s end.
But while revenue has increased as more stores have opened, so has the bottom line been choppy. The 4th quarter net loss of $3.8 million was up from $2.8 million in the same quarter of 2022. For the full year of 2023, however, Dutch Bros earned net income of $10 million compared to a $19.3 million loss in 2022.
The company expects 2024 revenue between $1.19 and $1.21 billion, up from $965.8 million in revenue for 2023. That’s around a 23% to 25% increase for the year.
Investors were pleased by the earnings call and the guidance for 2024, and BROS jumped by 27.1% after the report. The stock is now up 12.9% in the past year.
Why Did Starbucks Stock Drop?
SBUX, on the other hand, is down 7.89% over that same period. That’s despite a 4th quarter earnings release where Starbucks reported $9.43 billion in revenue, an 8% improvement over the year before. Though Starbucks far surpassed Dutch Bros in revenue, it failed to meet expected revenue of $9.59 billion by 2.1%.
The disappointment was attributed to global headwinds that Dutch Bros doesn’t face. Chinese coffee competitors have aggressively discounted their products and it is starting to take a toll on Starbucks’ bottom line. The average ticket for a Chinese Starbucks customer fell by 9% as consumers continue to cut costs in a tough economy.
In the middle of November, Starbucks reported slowing sales back at home in the US because of the company’s supposed stance on the Israel-Hamas war. Starbucks has hundreds of locations that are unionized and are represented by an organization called Starbucks Workers United.
The group posted on social media in support of Palestine, and that caused considerable backlash among pro-Israeli groups. Starbucks decried the post and brought a lawsuit against Starbucks Workers United.
The controversy, alongside the company’s 4th quarter revenue disappointment, resulted in a share price decline of 1.5% since earnings.
How Analysts Compare The Coffee Giants
Those concerns have weighed on Wall Street, and the consensus among 33 analysts is to Hold SBUX at the moment.
The average price target is $107.44, which would still represent a 17.3% gain. The lowest target is $95 per share. There isn’t a Sell rating on SBUX, and 14 analysts rate it as a Buy. The highest forecast has the stock reaching $127.
The analysts are a bit more bullish on BROS, with 8 out of 13 assessing it as a Buy. The average price target, however, is $35.17 per share, representing an increase of just 2.33% from where the stock currently trades.
The high forecast is $48 per share, which translates to a 39.6% increase. The lowest forecast has the stock declining by 12.7% to $30 per share.
Which Coffee Brand Is The Better Value?
The analysts lean toward Starbucks as the safer play at the moment, despite their reluctance to call it a buy. On a price-to-sales (P/S) basis, Dutch Bros comes out on top with a P/S value of 1.96. Starbucks comes in at a P/S of 2.89, which is higher but still comparable.
Starbucks has a price-to-equity value of 24.50, which falls below the fast-food industry average of 30. SBUX is also currently trading 20.7% lower than its 52-week high of $115.48. In mid-2021, the stock nearly hit $126.
That same year, Dutch Bros had its initial public offering, and the stock soared up to $76.24 shortly thereafter. But the enthusiasm was short-lived, and BROS is now down 21% all time, even after the recent run-up.
Dutch Bros Vs Starbucks Stock, Which Is Best?
Dutch Bros is growing almost three times faster than Starbucks, but is priced to perfection. Starbucks has 11.7% upside to fair value whereas Dutch Bros has very limited upside to its intrinsic value.
As a massive global chain, Starbucks continues to dominate the market and has weathered many controversies and will likely continue to do so. More concerning may be impacts from lagging Chinese revenue.
Dutch Bros has rapidly expanded its footprint and its revenue at the same time. That’s concerned some investors who believe that the company may be overreaching, and could accelerate losses.
There is still a lot to like about both companies. Starbucks will attract investors who are looking for stability and a strong dividend – SBUX currently has a 2.49% annual dividend yield. Dutch Bros will entice investors who are on the hunt for a growth stock, a company that has the potential to perhaps even be the next Starbucks.
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