Based in Oregon, coffee chain Dutch Bros (NYSE:BROS) went public on Sept. 14 at $23 per share, well above its pre-initial public offering (IPO) marketing price range. As a result, BROS stock remains on fire, even after gaining almost 60% on its first day of trading.
As of this writing, Dutch Bros stock is up 85% since its IPO, $3 away from a double in a single month. But it can’t possibly keep up this pace, can it?
Let’s take a look at the pros and cons of buying BROS stock in the low-to-mid $40s.
No Doubt, BROS Stock Has the Momentum
It’s always a good sign when an IPO prices well above its pre-IPO price range. Dutch Bros stock was priced at $23, some $3 over the top-end of its range. So, it wasn’t a surprise to the Street when it bolted out of the gate during its September debut.
In the trading days since then, BROS stock got as high as $62 before coming back to earth. What’s more, of those days, BROS closed up 50% of the time, slightly less than the 53.8% average for up days between 1950 and 2020.
However, the important thing to remember here is that, since closing its first day of trading at $36.68, the stock has managed to gain more than 16% in less than a month. I’d take that rate of return every day of the week.
So, I think it’s safe to say BROS stock has the momentum.
Fellow InvestorPlace contributor Mark Hake recently argued that this name is worth $51, providing a potential upside of 18% from current prices. Hake also suggested it wasn’t overvalued despite its meteoric rise. This was because its enterprise value is only 15 times sales — a multiple that’s in line with growth stocks.
Plus, let’s not forget that this company is growing sales at more than 40% — not too shabby for a coffee chain. Hake noted that, “if the company can grow its revenue by 40% over the next three years, it will reach $1.1 billion” by June 2024.
It Has Gotten Expensive Since the IPO
Dutch Bros currently has an enterprise value of $2.41 billion. Based on 471 locations, investors value each location at $5.12 million ($2.41 billion / 471).
However, at the end of its third quarter, Starbucks (NASDAQ:SBUX) had 33,295 stores open worldwide. Based on an enterprise value of $150.9 billion, investors value each location at $4.5 million. That’s 12% less.
One could argue that, since Starbucks grew its revenues by almost 21% year-over-year (YOY) in the first nine months of 2021 through Jun. 27, it deserves a higher valuation. But what if you compare the two based on revenue per location?
In the first six months of Dutch Bros’ fiscal year through Jun. 30, it had revenue of $228 million (Page 28). Double that number for annualized sales of $456 million and you get revenue per store of $968,152. In the first nine months of fiscal 2021, however, Starbucks had revenue of $20.9 billion at its company-owned and licensed stores. Annualize that to $27.8 billion and you get $834,960 per store. That’s 14% less per store than Dutch Bros.
So, on a per-store basis, one could argue that BROS stock still deserves a higher valuation.
The Bottom Line on BROS Stock
On Page 15 of Dutch Bros’ prospectus, the company estimates it could open 4,000 stores in the United States, almost 10 times the amount currently open.
If it gets anywhere close to that number, the excessive valuation argument goes out the window because, at almost $1 million in revenue per store, we’re talking about $4 billion in U.S. annual sales.
Dutch Bros’ current net margin is approximately 1.6%. That’s about one-sixth of Starbucks’ net margin. However, by adding 250 stores a year, its net margin should grow exponentially, too.
As such, I think BROS stock can keep moving higher in 2021, into 2022 and beyond. If you live anywhere where it operates and you like the coffee, I don’t see a problem with a small bet on its growth. However, you’d be wise to put aside a little cash to buy more, should it fall into the $30s.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.