1 Coffee Firm on a Caffeine High

Oregon-based coffee chain Dutch Bros (NYSE:BROS) has made waves among investors since going public in 2021.

Initially trading at $23, the stock skyrocketed to over $80 before beginning a long, slow slide that saw it lose well over 60% of its value.

As the company continues to expand its chain of affordably priced coffee shops, however, investors are once again taking notice of Dutch Bros stock.

Dutch Bros Targets 1,000 Locations By 2025

In Q3, Dutch Bros reported record revenues of $265 million, an increase of 33% over the year-ago quarter. Net income per diluted share more than doubled, rising from $0.03 a year ago to $0.07 in the most recent quarter and total net income for the quarter was $13.4 million on a GAAP basis while, on an adjusted basis, it was $22.4 million.

Dutch Bros has been able to nearly double its trailing 12-month revenues since the end of 2021. Based on Q3’s results, the future is bright for future revenue growth. Similarly, earnings are projected to continue climbing. The bottom line is forecast to grow by over 45% annually for the next 3-5 years.

The coffee enterprise is also continuing to expand its footprint of stores. In Q3, Dutch Bros opened 39 new locations, bringing its total number of stores to 794. This puts the chain within striking distance of its goal to have 1,000 locations by 2025.

A notable positive is that, while the new coffee shops will contribute to higher revenues, existing locations also saw same-store growth of 4% on a year-over-year basis.

Further, the company’s self-operated stores outperformed the broader group in the third quarter. While overall revenues rose by 33.3%, company-operated stores increased their revenues by 36.3%. Company-owned shops accounted for roughly $73.3 million of Dutch Bros’ total Q3 revenues.

One of the largest improvements Dutch Bros has seen over the past year is a massive increase in its cash holdings. At the end of 2022, the company held just $20.2 million in cash reserves. As of the end of Q3, that number had risen to $149.8 million. Total assets also increased dramatically, rising from $1.19 billion to $1.64 billion over the same period.

Putting all of that into the mix, is this coffee company on sale?

Is Dutch Bros Stock Undervalued?

According to 12 analysts, Dutch Bros stock is marginally undervalued by 10.1% to fair value at $33.33 per share.

We should highlight that a discounted cash flow analysis is nowhere near as optimistic for the future prospects of the firm and has a $24 intrinsic value target on the share price.

While earnings have been increasing consistently and net income is forecast to grow over the coming year, the cash flows are signaling at this point that the valuation is at a premium.

And to validate that thesis, we can’t overlook the fact that the price-to-earnings ratio is now sitting at an unbelievably high 914x, though price-to-sales are a much more reasonable 5.9x.

It’s clear that the company’s top brass are investing heavily in growth but at some point those investments need to pay off in the form of profits to keep investors enthralled.

Will A Caffeine Crash Follow?

Although Dutch Bros has achieved impressive growth so far, the company’s largest obstacle is undoubtedly from the highly competitive sector its in and specifically Starbucks.

As the dominant coffee chain in the United States, Starbucks has a brand advantage, loyal customers, and features in prime locations across the country to optimize its own revenues and also profitability.

By contrast, as Dutch Bros approaches its goal of 1,000 locations, its margins remain almost uncomfortably slim. Over the last year or so, Dutch Bros has recorded a net margin of under 1% and return on equity has been -2.2%.

Even in the case of a fast-growing company that is more focused on reinvesting than on generating positive earnings, these low margin numbers are concerning.

Because it has positioned itself as an affordable coffee option, Dutch Bros may also be especially sensitive to inflation and rising commodity costs.

While coffee shops like Starbucks have demonstrated robust pricing power over many years, Dutch Bros must keep its prices competitive to continue to appeal to its customer base. This could harm the company in the long run, especially as it attempts to improve its aforementioned low margins.

Is Dutch Bros a Buy?

While Dutch Bros’ growth and overall business potential make it attractive, the stock is likely priced at too much of a premium to make it a good investment at the moment.

Even with the large earnings growth expected from Dutch Bros, there is little margin of safety in the stock at its current multiples. Given the risks and high growth assumptions associated with the stock, there are likely better buys available in the market today.

Another factor that may make Dutch Bros stock less appealing for investors is the fact that the company is still issuing new shares to raise expansion capital.

When Dutch Bros went public, it sold 46 million shares of outstanding stock. Today, there are about 60 million shares of Dutch Bros. This expansion includes the issuing of about 3 million new shares in Q3. As such, investors may face further dilution of their stakes in the company if Dutch Bros continues to fund its expansion with additional share issues.

Dutch Bros is likely best to hold at the moment. Current shareholders could see higher prices as earnings improve. Those who do not own shares of Dutch Bros at the moment may also want to keep an eye on the stock, as there may be more reasonable buying opportunities in the future.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.