Dutch Bros (NYSE:BROS) went public in mid-September at $23. Then, BROS stock gained more than 59% on its first day, closing at $36.68. Over the next month and a half, its share price rocketed to as high as $81.40 before coming back to earth, falling from those highs.
As of the close of Dec. 8, BROS stock traded for just under $52. So, the question for investors now is whether this Oregon-based coffee chain is a $23 stock or an $81 stock.
That’s a tricky question to answer. Here’s why.
BROS Stock: I Liked Shares at $42
The last time I wrote about Dutch Bros — which was also my first time writing on the stock — I suggested that its frenetic growth should keep its share price moving higher. Here’s what I said about its sales and profit margins back in October, when the share price was around $42:
“[Dutch Bros] 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.”
Starbucks (NASDAQ:SBUX) currently trades at 4.7 times sales. Its highest valuation over the past decade was in 2020, when it traded at more than 5.3 times sales. In mid-November, Dutch Bros reported sales for the nine months ended Sept. 30 of $358 million. Annualize this and we’re talking $477 million for the entire fiscal 2021.
If we apply a multiple of 5.3 times sales — the same as Starbucks in 2020 — you get a market capitalization of $2.53 billion. Using the Dec. 8 close, however, the BROS market cap is $2.44 billion based on 47.23 million shares outstanding.
So, you might argue that its shares are worth about $53.57 based on 2021 sales. But assuming the company adds 1,000 stores every four years, it will get to 4,000 stores in 14 years. Based on $4 billion in revenue and 5.3 times sales, it would have a market capitalization in 2035 of $21.2 billion.
Assuming all of this works out, we’re talking about a 17.6 compound annual growth rate (CAGR) over almost 1.5 decades at current prices. A $10,000 investment today would be worth $96,761 in 2035.
In addition, both Dutch Bros’ price-sales (P/S) multiple and actual revenue may be higher in 14 years, so buying at current prices makes sense from a risk-reward perspective. It’s an $81 stock at some point in 2022 or 2023.
Comparing Starbucks and Dutch Bros
In fiscal 2021 (September 2021 year-end), Starbucks had $29.1 billion in revenue, $4.7 billion in operating income and $4.5 billion in free cash flow (FCF). These were all records, which is appropriate for the company’s 50th anniversary. Further, I think it’s fair to say SBUX stock deserves a higher multiple than the rest of its competition in the U.S. and elsewhere.
The reality is that Dutch Bros’ IPO share price of $23 valued its equity at $1.09 billion, or 2.3 times its 2021 annualized sales estimate of $477 million mentioned earlier. That’s about half Starbucks’ current multiple.
Is that fair? It could be.
In 2019, Dutch Bros’ operating margin was 12.7%. In 2020, it was 3.3%. Finally, for the trailing 12 months, it’s -24.7%. As the company grows its store footprint, the margin is going backward. In the latest quarter, selling, general and administrative (SG&A) expenses increased by roughly 487% to $153.7 million.
Almost 82% of this amount was for equity-based compensation charges. If you exclude compensation, its SG&A increased by 76% to $28.9 million, making an operating profit similar to Q3 2020.
However, Starbucks’ non-GAAP operating margin in fiscal 2021 was 18.1%, almost double its 9.1% operating margin a year earlier. Even against Dutch Bros’ 2019 operating margin, Starbucks’ margin is 43% higher.
As such, I think you can make an argument that an appropriate P/S ratio here is somewhere between Starbucks at 4.5 times sales and Dutch Bros’ initial public offering (IPO) valuation of 2.3 times sales.
The Bottom Line on BROS Stock
As I said in October, while a small bet on BROS stock in the low to mid $40s shouldn’t be a problem long-term, I also suggest you put aside some cash and look for an opportunity to buy it in the $30s.
That said, I suspect that Dutch Bros’ Q4 2021 report will be very positive. The news will likely push its shares higher. So, buy some now, then wait to see if you can get some shares for less over the next three months.
Long-term, though, you usually can’t go wrong with coffee stocks.
On the date of publication, Will Ashworth did not hold (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.