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Dutch Bros Stock Is Way Too Expensive Given Its Negative Catalysts

Dutch Bros (NYSE:BROS) stock has multiple, negative catalysts and a few positive catalysts. I recommend avoiding BROS stock for now.

A Dutch Bros coffee shop representing BROS Stock.
Source: Alexander Oganezov /

Among the shares’ positive catalysts are the fact that many of the company’s customers are reportedly young. Also, the company’s comparable-store sales numbers increased meaningfully in the third quarter and have been climbing for many years.

On the negative side, there are indications that Dutch Bros’ sector and the company itself are likely to disproportionately suffer from lingering Covid fears.

Finally, the sector is extremely crowded and competitive, and the valuation of BROS stock is rather elevated at this point.

Positive Catalysts

Dutch Bros reportedly caters to Generation Z. As a result, I think that the company could benefit from what I call “the Snapchat phenomenon” that has boosted Snap (NYSE:SNAP) for a long time.

“The Snapchat phenomenon” refers to a process by which a company is very popular with young consumers and generates higher revenue and profits as their average incomes climb.

Dutch Bros’ same-store sales jumped 7.3% year-over-year in Q3 and 10.7% versus the same period two years earlier.  What’s more, the company’s same-store sales have increased for 14 straight years.

The coffee shop operator is expanding rapidly, and it is focusing on adding many more company-owned shops instead of increasing its franchised locations. The Restaurant News reported in August that the company’s margin from company-owned locations was 29% in 2020. That’s fairly robust profitability for a restaurant chain.

Negative Catalysts

In some ways, younger Americans have been more negatively affected by the coronavirus pandemic than their younger peers.

According to a Kaiser Foundation report published in May, “During the pandemic, a larger than average share of young adults (ages 18-24) report symptoms of anxiety and/or depressive disorder (56%). Compared to all adults, young adults are more likely to report substance use (25% vs. 13%) and suicidal thoughts (26% vs. 11%).”

Over time, these trends could hurt the financial results of companies like Dutch Bros., which depend primarily on young consumers.

I see a great deal of evidence that the coronavirus (including the omicron variant) is becoming endemic and now poses no meaningful danger to the vast majority of young, vaccinated people. But the media and government are, for the most part, not conveying those realities.

Moreover, I believe the work-from-home trend has generally lowered demand for coffee from coffee shops, as more Americans working from home make coffee for themselves.

Starbucks (NASDAQ:SBUX), for example, in August, reported that reopening had generated increased demand. It’s highly likely that the reverse is also true. An increase in the number of people working from home is negative for Starbucks and its competitors.

Indeed, according to a January 2021 article in World Coffee Portal, “Allegra World Coffee Portal estimates the US branded coffee shop segment to be valued at $36bn, a decline of 24% over the last 12 months predominantly due to Covid-19 disruption.”

Also worth mentioning is that there’s a tremendous amount of competition in the U.S. coffee shop sector. World Coffee Portal reported that there were nearly 37,200 coffee shops in the U.S.

The Bottom Line on BROS Stock

The shares are trading at a forward price-earnings ratio, based on analysts’ average 2022 earnings per share estimate, of over 100. Given Dutch Bros’ tough challenges, that’s an excessive price to pay. Consequently, I urge investors to sell the shares for now.

If BROS stock drops sharply and/or its challenges ease, it may be worth taking a bullish position in the name down the road.

On the date of publication, Larry Ramer 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 Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. 

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