Dutch Bros (NYSE: BROS) is getting a lot of attention these days. And it makes sense why. Although shares are down 45% from their peak (on June 27), they have skyrocketed 79% over the past nine months – strong momentum that has continued into 2024.
This may come as a shock, but I think investors Dutch Bros. better forget. There’s another great one coffee stock which should be purchased instead.
The bullishness around Dutch Bros
Investors were certainly happy when Dutch Bros reported its first-quarter 2024 financial results in early May. Revenue rose 39% year over year, with same-store sales up a whopping 10%. The company also reported operating income of $25.6 million, much better than the $232,000 loss in the same period last year. All signs point to a company experiencing robust consumer demand, resulting in strong financial results.
Dutch Bros’ market cap currently stands at $6.5 billion. But the company most optimistic supporters I think this figure will be many times higher in the future.
That’s because the growth prospects are promising. The key to Dutch Bros’ strategy is aggressively opening new stores. After opening 159 new locations in 2023 and 45 in the first three months of this year, the total will reach 876. Executives believe Dutch Bros’ footprint could reach 4,000 stores in the next 10 to 15 years.
That huge potential is exactly what investors are excited about. If the company even comes close to that figure, its revenue will be significantly higher.
The market loves a good growth story. Dutch Bros shares are trading at a nosebleed future price-earnings ratio (P/E) of 113.5. To me, this more than fully reflects the optimism surrounding the company.
The pessimism surrounding Starbucks
But the long-term success of Dutch Bros is far from guaranteed. And the current valuation leaves no room for error. I’d rather not take that bet.
Instead, I think it’s a smarter idea to consider buying back shares Starbucks (NASDAQ: SBUX)The stock is down 37% from its peak and now trades at a very reasonable forward price/earnings ratio of 22.1.
At Dutch Bros, investors should be concerned about execution risk. Any management team can throw out a lofty store target. However, the intensely competitive nature of the restaurant industry means that Dutch Bros will have a challenging time achieving its goal.
On the other hand, Starbucks already dominates the sector, with its 16,600 stores in the US and 38,951 in total worldwide. The only takeaway for investors is that the company is in a rough patch, as same-store sales fell 4% in the second quarter of 2024 (ending March 31). In a tough macroeconomic environment, consumers might hesitate to pay for Starbucks’ beverages.
Nevertheless, the company has a powerful branda competitive moat that Dutch Bros can’t match. This has historically given Starbucks enormous consumer share and pricing power, not to mention helping the company develop a top-notch tech foundation and loyalty program.
The battle could continue for the foreseeable future, but I expect Starbucks will eventually return to healthy same-store sales and profit growth. This vision 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 plans to open. That means Dutch Bros will likely have to compete directly with Starbucks for attractive real estate or hiring talented employees. The Seattle-based chain has significantly more scale and financial resources to better execute its growth strategy than its smaller rival.
And that is why, in my opinion, it is a wiser share to buy.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
Forget Dutch Bros: Consider These Gorgeous Coffee Stocks Instead was originally published by The Motley Fool
