Dutch Bros Is Worth 33% More Based on Its Excellent Growth

Dutch Bros (NYSE:BROS) went public on Sept. 14 at $23 per share and has since spiked to a peak closing price of $76.25. As of midday Nov. 15, BROS stock was at $62.52. Some argue it is overvalued, but I am not so sure.

A Dutch Bros coffee shop representing BROS Stock.

Source: Alexander Oganezov / Shutterstock.com

That is what I wrote on Oct. 1, when I predicted the stock would rise at least 18% higher to $51 per share. But even though BROS stock surpassed that level, I still think the drive-through coffee retailer could have good upside.

This is significant for a stock that has risen 170% since its IPO price. In fact, as of Nov. 15, BROS stock was up 70% since its first day of trading, when it closed at $36.68 per share. However, I still think the stock has much further to rise.

Q3 Financial Results

One reason is that the company produced stellar third-quarter results, as seen in its earnings report released on Nov. 10. Along with its strong financials, the company guided for higher growth. Dutch Bros now has more than 500 shops, including 33 new shops that opened during the quarter. 30 of these locations are company-owned.

This resulted in a 49.8% year-over-year (YOY) gain in revenue during Q3 to $129.8 million, as well as adjusted net income of $11 million, or 23 cents per share. The company also produced adjusted EBITDA of $20.6 million, down slightly from last year.

Moreover, Dutch Bros indicated that it expects Q4 revenue of $125 million to $128 million. That is roughly equal to this past quarter, but it could be purposefully too low so the company can easily outperform its forecast.

One reason I think this is the case is that eight analysts now forecast an average full-year revenue of $671 million next year. This works out to 38.2% higher than their forecasts of $485.7 million for 2021.

Keep in mind that last year, the company saw revenue of just $327.4 million. So not only is it forecasting growth of 48.3% this year, but by the end of 2022, revenue will have more than doubled since 2020.

Where This Leaves Dutch Bros Stock

When I wrote my article last month, I felt that this growth rate was not adequately “in” the stock price. For example, with this level of growth, I would expect the company could make at least a 15% EBITDA margin.

That would put the adjusted EBITDA at $100 million for 2022. By 2023, when revenue is forecast to hit $866 million, adjusted EBITDA would reach $130 million.

A reasonable multiple for that level of earnings would be 30x. This puts its market value at $3.9 billion. Compared to today’s market value of $3.1 billion, it implies that over the next two years, BROS stock could rise 25.8%.

As a result, BROS stock could rise another 26% to $78.65 per share. This is based on a 30 times multiple on a projected 15% margin by the end of 2023.

Another way to value BROS stock is by using price-to-sales (P/S) metrics. For example, using a 5x multiple for 2023 revenue of $866 million, the value would be $4.33 billion. That is $1.23 billion over its $3.1 billion market value today, or 40% higher. That puts its value at $87.53 per share.

What to Do With BROS Stock

Currently, BROS stock is worth between $78.65 and $87.53 per share. This gives it an average target value of $83.09 per share. That is 32.9% higher than its Nov. 15 price.

This means given the company’s huge growth rates, investors can still expect to see BROS stock rise at least one-third more.

However, that fully discounts the next two years of revenue and earnings growth. I have not discounted that growth, bringing it to the present value.

As such, it represents an average return on investment (ROI) of 15.3% each year. That number is on a compounded basis for the next two years. If it takes less time than that to occur, then the average ROI for BROS stock will be higher.

On the date of publication, Mark R. Hake 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. 

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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