Dutch Bros (NYSE: BROS) launched its IPO last September amid a rapid expansion. The beverage company benefited from a successful introduction that closed at almost $37 per share on its first day of trading, 60% above its initial IPO price of $23 per share.
However, since peaking at more than $81 per share in November, the coffee stock erased all of its gains, and inflation has brought growth concerns. Given these challenges and the discounted stock price, should investors consider Dutch Bros before its Aug. 10 earnings report?
The Dutch Bros growth story
Consumers seem to have taken to the company’s handcrafted beverages. While it started with espresso-based drinks, it also sells beverages such as teas, lemonades, smoothies, and sodas.
Also, unlike its largest competitor, Starbucks, it offers no indoor seating. Thus, it does not provide the Americanized version of the Italian coffeehouse experience like Starbucks, making the quality of its drinks that much more critical.
At first glance, one might want to buy Dutch Bros stock for just its growth. At the end of the first quarter of 2022, it operated 572 shops, 26% more shops than the end of Q1 2021. Given that it intends to grow to 4,000 shops over the next 10 to 15 years, Dutch Bros stock has attracted significant interest.
Dutch Bros’ emerging challenges
Unfortunately for Dutch Bros, it operates a consumer-based business in a time of added difficulties for the average American. With more money going to necessities, consumers have less disposable income to spend on beverages.
This has slowed the economy as the government has reported two straight quarters of negative economic growth. Such conditions bode poorly for Dutch Bros. Consequently, the stock price has fallen by nearly 55% since last October, though it continues to outperform both Starbucks and the S&P 500.
The company said in its last earnings report that it expected to add 30 stores during Q2. Given that performance, investors will probably watch upcoming earnings reports to see if they match that number and whether it plans to change its growth trajectory.
Despite its challenges, this coffee stock is still growing. Analysts expect the company to bring in $182 million in revenue in Q2, a 20% increase versus Q1.
Moreover, Dutch Bros continues to add stores and still projects between $700 million and $715 million in revenue in 2022. This means a 42% revenue increase at the midpoint if the forecast holds. Nonetheless, it missed earnings in Q1 as the effects of higher labor costs and rapid inflation in the cost of goods took hold.
Other projections point to possible valuation-related challenges. Analysts project earnings of $0.25 per share for 2022, down from $0.30 in 2021. This comes despite a higher store count and considerable revenue increases.
At current prices, it would also imply a forward P/E ratio of approximately 150. Investors often forgive such multiples in a bull market, but given the negative economic sentiment, they might balk at such a valuation.
Should I consider Dutch Bros before earnings?
Investors should think twice about buying Dutch Bros at current levels, at least before earnings. Admittedly, it has outperformed both Starbucks and the S&P 500 since its IPO, and it will probably continue to add new shops. This gives it a strong chance of outperforming the indexes longer term.
However, it faces higher costs and slower customer growth at a time when the market still prices its stock at a premium valuation. While it probably warrants another look when conditions improve, investors should wait for better stock performance.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends the following options: short July 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy.