Down 28%, Should You Buy Dutch Bros Stock Right Now and Hold for the Next 20 Years?

When investors think about the retail coffee industry, I'm sure Starbucks immediately comes to mind. Its $38 billion in annualized revenue and more than 40,000 locations across the globe make it a leader in the market.

But Dutch Bros (NYSE: BROS) isn't fazed. The Oregon-based coffeehouse chain is winning over investors. Shares are up 84% in the past five months (as of April 1). However, volatility has hit this restaurant stock, which is down 28% from its February all-time high.

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Should you buy Dutch Bros on the dip and hold it for the next 20 years? Investors should look at both the good and the bad before making a decision that can impact their portfolios.

Growth is the primary focus

Dutch Bros currently has 982 stores, mainly scattered in the western and southern parts of the U.S. It has caught on with consumers because of its fully customizable menu, innovative drinks, and friendly customer service. The company also positions itself as a youthful and energetic brand.

Convenience is the name of the game. Drive-thru lanes are the bread and butter for Dutch Bros. This supports having a smaller physical space for its retail locations. And the loyalty program, which was launched in 2021, has been a success. Management says that 71% of transactions came from these members in Q4.

Expansion has been noteworthy. Dutch Bros' store count increased by 83% just in the past three years. Of course, that kind of growth has propelled the top line. Revenue climbed at a compound annual rate of 37% between 2021 and 2024.

The leadership team plans to open at least 160 new locations in 2025. And over the next 10 to 15 years, the target is to get to 4,000 stores. Revenue would be astronomically higher if that kind of scale is reached.

To its credit, Dutch Bros is steadily becoming more profitable. It reported a net loss of $121 million in 2021. That flipped to positive net income of $35 million last year. Consensus analyst estimates forecast earnings per share to grow 130% between 2024 and 2027.

Far from a sure thing

Dutch Bros is opening new locations at a brisk pace. However, same-store sales (SSS), one of the most important metrics for restaurants, don't give investors that much reason to be overly optimistic. On a systemwide basis, the average annual SSS increase (not a compounded rate) in the past five years was just 3.9%. Investors should want to see this figure rising at a faster clip, as it indicates more productivity from existing locations, especially for a younger business.

Starbucks, on the other hand, has seen its U.S. SSS rise at a yearly average rate of 5.6%, although it's been more volatile. And thanks to its decades-long history dominating the industry, Starbucks has developed sustainable competitive advantages. Its brand and scale help it maintain its market position over an extended period of time and earn a return on invested capital that's significantly higher than what Dutch Bros does.

Consequently, it's valid to argue that Dutch Bros doesn't have an economic moat. Maybe it will get there with time, but I don't think it's there yet. This makes the business riskier to own over a 20-year period.

The stock might be trading down, but the valuation is extremely expensive. Shares trade at a nosebleed price-to-earnings ratio of 181 and price-to-sales multiple of 5. Both imply lofty expectations for the future, pricing in almost flawless execution on the management team's part.

Long-term success is not a sure thing. With no margin of safety, I don't believe Dutch Bros stock is a smart buy today.

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Neil Patel and his clients have 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.