Could Dutch Bros Be a Millionaire-Maker Stock?

With a nearly 12,000% gain since its IPO, Starbucks (NASDAQ: SBUX) has undoubtedly created a few millionaires out of investors that bought its stock in the early days and held on to it over the years. Given Starbucks' huge returns, investors may be wondering if there could be another big coffee stock winner brewing.

The coffeehouse operator with the best chance to replicate Starbucks' success is Dutch Bros (NYSE: BROS). Let's look at the opportunities in front of the company.

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The right ingredients

In order for restaurant stocks to become huge winners, they need two main ingredients. The first is a highly successful concept that continues to grow and produce solid free cash flow. The second is a small base from which the company can greatly expand.

In terms of a having a successful concept, Dutch Bros' stores have been performing well. This can be seen in its same-store sales numbers, which have grown solidly this year. Over the past four quarters, its same-store sales have been up 5%, 10%, 4.1%, and 2.7%, respectively. This is despite the company densifying its store base, building new shops close to existing shops that have taken away sales from those existing shops.

In addition, the company has a couple of potential same-store sales drivers brewing. The first is that the company has just begun to implement mobile ordering. This has proven to be a solid growth driver in the quick-serve restaurant industry. Thus far, mobile ordering is available in about 90% of its locations. Meanwhile, the company has said it sees about a 5% increase in frequency from customers that have been using mobile ordering.

Another potential same-shop sales driver is food. Currently, food only makes up about 2% of its sales. However, the company has begun testing an expanded food menu in six of its shops. It said based on the results that it sees food playing a larger role going forward. By comparison, Starbucks gets about 23% of its sales from food items.

Meanwhile, its company-owned locations have solid contribution margins, or restaurant-level margins. This is how much operating income each shop makes after taking out noncash depreciation and amortization expenses expressed as a percentage. Last quarter, it was a very strong 29.5%.

Image source: Getty Images.

At the same time, with only 950 stores in 18 states, of which 645 are company operated, Dutch Bros has a large expansion opportunity in front of it. By comparison, Starbucks had 11,161 locations in just North America, and over 21,000 globally, at the end of its last quarter that ended in September.

Dutch Bros stores also tend to be on the smaller side and primarily serve its customers through drive-through windows. The newer models it is building are generally between 800 to 1,000 square feet in size, with a walk-up window and multiple drive-thru lanes served by one window. It also has a few endcap locations with a lobby that are about 1,200 square feet each.

The smaller size without a dining area makes Dutch Bros locations relatively cheap to build. Its stores are typically profitable only two quarters after opening. At the time of its IPO, it cost $635,000 to $1.5 million to open a new shop depending on whether it used a build-to-suit arrangement (the developer managed and was accountable for the cost of the project and it had higher rents) or a ground lease (Dutch Bros would build the building itself and it would have lower rent). Its year-two cash-on-cash returns were between 35% and 75% depending on the arrangement. That indicates that new stores, even with the higher-cost ground leases, would have about a three-year payback period, which is attractive.

Importantly, Dutch Bros is generating solid free cash flow, which is allowing it to execute its build strategy. Dutch Bros is looking to open at least 160 new stores this year and accelerate its new store openings even more in 2026. It has said its goal is to have 4,000 locations within the next 10 to 15 years.

Is Dutch Bros a millionaire maker?

Trading at a forward price-to-sales (P/S) multiple of 3.6 times, Dutch Bros stock is more expensive than the 2.7 times multiple Starbucks carries. However, it has a much longer expansion growth runway.

BROS PS Ratio (Forward 1y) data by YCharts

If Dutch Bros can quadruple its store base over the next 10 years, the stock will have a lot of upside from here. Its stores already produce similar average unit volumes (AUVs, the average sales of each store) to Starbucks, and its AUVs should grow with food and online ordering.

That's probably not enough to be a millionaire-making stock in the next 10 years unless you're starting with a pretty large investment, but the stock still looks like it has a lot of upside in in the years ahead.

Should you invest $1,000 in Dutch Bros right now?

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Geoffrey Seiler 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.