Dutch Bros' (NYSE: BROS) stock price has roughly doubled over the past year. Given the growth that the coffee chain has achieved, that's perhaps not surprising. But there's a small problem here that investors have to consider: Is Dutch Bros growing enough to justify its price tag?
What are investors paying for Dutch Bros?
There are a number of traditional valuation metrics that investors lean on when trying to assess how attractive a stock is, including the price-to-sales (P/S), price-to-earnings (P/E), and price-to-book-value (P/B) ratios. Right now, Dutch Bros' P/S ratio is 5.2, its P/E is 190, and its P/B is nearly 14.
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There's not much to glean from these numbers without some comparison points. One of the common ways to assess valuation is to compare a stock's current valuation multiples to its historical trends in those same metrics. This way you can see how views have changed over time, and figure out if today's view is that shares are relatively cheap or relatively expensive.
That's not a useful option for Dutch Bros because it's only been public for a couple of years. In fact, there isn't enough data to calculate a three-year average for any of these metrics yet.
That leaves two other options. The ratios can be compared to those of competitors and to the broader market, and the ratios can be considered on an absolute basis.
With regard to competitors, the obvious direct choice is Starbucks(NASDAQ: SBUX). This iconic coffee chain's P/S ratio is 3.5, its P/E is nearly 33, and the P/B isn't meaningful because its book value is negative. But clearly, the first two valuation metrics suggest that Dutch Bros is relatively expensive compared to Starbucks.
Looking at the broader market, the S&P 500 index (SNPINDEX: ^GSPC) has a P/S ratio of 2.9, a P/E ratio of 22, and a P/B ratio of nearly 4.4. So both Dutch Bros and Starbucks look expensive relative to the broader market.
That said, using price-to-earnings, the most common valuation tool, there's a huge distance between Dutch Bros and the other two. A P/E of 190 is a shockingly high figure that suggests investors are expecting near-perfection from the company.
What has Dutch Bros been doing?
With the lofty valuation here, Dutch Bros has to be thought of as a restaurant chain that's growing rapidly. In 2024 it managed to increase its top line by a huge 32.6%. That was driven largely by opening 151 new locations. And management doesn't seem to have overextended the concept, because same-store sales rose a respectable 5.3% for the year.
It's true that transactions fell 0.1%, which means that price increases were the main driver of the same-store sales gain, not more customers. But a 0.1% traffic decline, while not good, isn't exactly a bad outcome.
Looking ahead to 2025, Dutch Bros plans to open at least 160 new locations and generate same-store sales growth of between 2% and 4%. It's projecting revenue of between $1.555 billion and $1.575 billion, which translates to growth of 21% to 23%. That's strong growth for sure, though not quite as strong as in 2024.
As a company gains scale, growth gets harder to achieve, so it's hardly shocking to see that Dutch Bros' growth rate is expected to be lower. However, the valuation here is so high that any shortfall on the growth front could lead to a reevaluation of the stock on Wall Street. Or, to put that more bluntly, the stock could fall sharply if investors are unhappy with Dutch Bros' growth -- which is interesting because the share price has declined around 30% since the company reported full-year 2024 earnings in February.
Dutch Bros is cheaper than it was, but still expensive
Dutch Bros is a small and fast-growing restaurant chain. Its stock price has risen sharply, resulting in a lofty valuation relative to both a large competitor and to the broader market. That remains true even after a sharp decline in the stock.
This is not a good choice for risk-averse investors, or anyone who has a value bias. And even growth investors should probably tread with caution. You have to believe strongly that Dutch Bros is going to execute at a high level to justify the price tag on the stock today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
