Dutch Bros (NYSE:BROS) went public on Sept. 14 at $23.00 per share and immediately spiked to $43.32 as of Sept. 30. That is a gain of more than 88.3% and has led some to argue that BROS stock is overvalued.
I looked at some of the numbers in the initial public offering (IPO) prospectus, and I am not convinced. I suspect there could be a higher price for the stock sometime in the next 12 months.
One reason I think BROS stock is not overvalued is that the enterprise value (EV)-to-sales ratio is about 15 times sales. For many growth stocks, that is not that high a multiple.
Dutch Bros Growth
Dutch Bros is clearly on a growth trajectory. For example, in 2020, the company made $327.4 million in revenue. However, it brought in $404.5 million in revenue for the 12 months ending June 3. That is a gain of 23.5% on an annual basis just within six months. These figures can be seen on page five of its recent IPO prospectus.
Moreover, its adjusted EBITDA has been growing nicely. This is a form of cash flow that helps us understand its underlying business.
For example, in 2020, Dutch Bros made $69.8 million in adjusted EBITDA. By June 30, it had made $80.1 million in the prior 12 months. That represents annualized growth of 14.8% within six months.
Moreover, page 29 of the prospectus shows the operating company called Dutch Bros Opco grew its revenue 51% in the last six months. It increased from $150.9 million last year to $228 million for the six months ending June 30.
The underlying business is on a tear. That deserves a high valuation.
Valuing Dutch Bros Stock
Right now, there are no analyst projections for the company. But we can use a simple compounding factor to project the revenue. For example, if the company can grow its revenue by 40% over the next three years, it will reach $1.1 billion by June 30, 2024.
This is due to the power of compounding high growth rates. For example, if one compounds 40% over three years, the result will be 2.744 times the base number for $404.5 million.
Currently, Dutch Bros has 163.234 million shares outstanding, as seen on page 22 of the prospectus. After adding in 3.158 million shares from selling brokers, the total number of Class A equivalent shares outstanding is 166.392 million. Therefore, at $43.32, Dutch Bros has a market capitalization of $7.208 billion.
That means by June 2023, three years from now, BROS stock has a price-to-sales (P/S) metric of just 6.449 times sales. This is seen by dividing its $7.2 billion market value by the $1.1 billion in sales it could see in three years.
What BROS Stock Is Worth
Moreover, the company raised $515 from the IPO according page 22 of the prospectus. After $7 million in expenses, it will have $508 million in cash.
Dutch Bros also had $198 million in senior secured debt and $25 million in revolving debt based on page 64 of the prospectus. Therefore, it has net cash of $285 million. That lowers its enterprise value to just $6.923 billion.
As a result, the stock has an EV-to-sales multiple of just 6.29 by June 2024. That is probably too cheap. At 10 times EV-to-Sales, its EV would be $11 billion. After you add back the net $285 million in cash, its market cap would be $11.285 billion.
Now, $11.285 billion is 56.5% higher than today’s market capitalization. However, we must first bring the future value of $11.285 billion for Dutch Bros back to the present using a discount rate. For example, a 10% discount factor over three years works out to 75.13%. That lowers the future value to $8.478 billion.
This implies that Dutch Bros stock is worth 17.6% more (i.e., $8.478 billion divided by $7.2 billion). Therefore, BROS stock has a target price 17.6% higher than its $43.32 price as of yesterday, which amounts to $50.94.
So, for those investors who think the stock is too high, consider its growth rate and look forward a bit. My best estimate is that it’s worth almost 18% more at about $51 per share.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.