Dutch Bros Will Give Investors a Jolt When the IPO Buzz Wears Off
Every few years a food and beverage company comes public that captures the imagination of investors for the nationwide expansion possibilities to come.
Soon after its IPO, Shake Shack (SHAK) was hailed, “The Tesla of Hamburgers!,” and anointed winner of greenfield opportunities to expand its footprint worldwide for eager new diners. After four months as a public company in 2015, the stock shot up from $40 to $95 in a rush of investor euphoria. Revenue has exploded in the ensuing six years, from $190 million to $700 million. Yet, amid the growth, the stock has languished, currently trading around $74 — going on seven years of dead money although a volatile ride with key buying opportunities.
The history of Shake Shake seems relevant to the future of the latest hot newcomer to Wall Street, Dutch Bros Inc. (BROS) . The company sells coffee and other beverages in a small store format, often only drive-through. There’s a wise investment thesis that says, “Don’t ever bet against caffeine consumption,” but the stock of Dutch Bros needs more scrutiny in light of the valuation the market currently supports.
Like with Shake Shack, investors often make a mistake bidding up recent IPOs because they can trade exceptionally well in the first few months when the float is limited prior to lockup expirations and potential secondary offerings. The lack of shares in the float causes the stock to trade at a premium price to what fundamentals would dictate.
Dutch Bros’ stock is enjoying a healthy premium. After the IPO in September priced at $23, the shares are about 150% higher at $58. The market cap stands at close to $10 billion, 20x this year’s sales estimates with earnings of around $0.25 per share.
Bros’ expected revenue growth trajectory is impressive, as it was with Shake Shack, which grew 350% over six years. After Shake Shack’s early stock run, its multiple to sales was around 10x. After years of growth and stock dilution, the Shack now trades for 4x sales even with 30% revenue growth expected in 2022.
The question investors need to ask is, how much growth is baked in? At 20x sales with hardly any earnings, it’s hard to argue that the stock ought to be higher. Earnings reported later this month should look solid, with revenue growth of around 50% — perhaps accompanied by some breathless reporting. Yet, caution is warranted with a large share lockup expiration soon to follow in March.
Historically, purveyors of caffeine — Starbucks (SBUX) and Monster Beverage (MNST) among them — have been huge winners on Wall Street. Perhaps one day, Dutch Bros will be a winner as well. But in the Street’s enthusiasm for the coffee retailer, helped by a small float, the stock has very high expectations already priced in.
The easy call for investors to foresee is that Dutch Bros will have a significant business expansion in years to come. The current 500-store base can eventually grow to 4,000, according to the CEO. The tricky part is figuring out a reasonable price to pay for the expected growth, particularly when the company has scant earnings. Much better entries in Shake Shack were made after the initial euphoria wore off, and I believe far better prices for buying Dutch Bros shares will come down the road as well.
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