Is Dutch Bros a Buy, Sell, or Hold in 2025?

Coffee chain Dutch Bros (NYSE: BROS) is on a roll. The company has crushed Wall Street's consensus estimates in the last six earnings reports, driving stock prices 80% higher over the last year. Is Dutch Bros a great stock to buy heading into 2025, a risky investment to sell today, or something in between?

Let's find out.

The bullish argument for Dutch Bros

Famous for its high-energy customer interactions, a focus on drive-thru service, and friendly "Broistas" behind the pickup window, Dutch Bros is expanding rapidly.

The company has been around since 1992, but it was a pure West Coast operation for many years. The business kicked into a higher gear of growth after filing an initial public offering in 2021.

Today, you can find 950 Dutch Bros stores in 18 states. That includes 38 new locations across 11 states opened in the third quarter of 2024. The Oregon-based Dutch Bros experience is going nationwide in a hurry.

And the business is booming from an organic point of view. Same-store sales rose 2.7% year over year, while larger rival Starbucks (NASDAQ: SBUX) saw its North American comps fall 6% over the same period. Dutch Bros' revenues surged 28% higher. Net margins are rising, free cash flows turned positive in the third quarter, and nine of the 12 analyst firms that follow this stock are calling it a "buy" or better.

What's not to love about this exciting growth stock?

Challenges and valuation concerns

It's not all rainbows and iced Golden Eagles, though. Dutch Bros has a couple of downsides from an investor's perspective.

This is a very pricey stock, trading at 177 times earnings and 97 times forward earnings estimates. Supporting these lofty valuation ratios will require monumental growth for years to come.

Because of its negative cash flows, Dutch Bros has an uncomfortable habit of raising money through additional stock sales. The share count has nearly doubled in two years, with a 41% increase in the last year. As a result, Dutch Bros' market cap soared 171% higher in 12 months while investors pocketed a smaller 80% gain. That's a lot of share dilution, directly reducing shareholder returns.

It's hard to complain about a one-year return of 80%, but Dutch Bros is effectively asking shareholders for extra cash. Management hopes to make the company "self-funding" with positive cash flows in the near future, but that hasn't been the story so far.

Is Dutch Bros a buy or not? It depends!

It's the same old story -- Dutch Bros may be the perfect stock to buy for growth investors, but value hunters should look elsewhere.

The business is booming, and Dutch Bros thrives while rival chains are struggling. The expansion push is expensive, but Dutch Bros manages the financial risk by raising extra cash and preferring long-term leases over actually buying land for its new locations. The soaring valuation ratios should settle down over time as sales and profits continue to surge.

On the other hand, there are no guarantees that everything will work out in Dutch Bros' favor.

What if Starbucks overcomes its recent struggles under new management, undermining Dutch Bros' growth prospects? And you know what happened to growth stocks in the last economic crisis. This market darling could take a dramatic haircut if this bull market runs out of steam. So, Dutch Bros is not the safest place to park money you might need in the not-too-distant future.

All things considered, I see Dutch Bros as an exciting growth stock with a couple of troublesome flaws. It's an interesting stock to buy, but only if you can handle substantial market risks.

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Anders Bylund 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.