When it comes to looking at undervalued stocks, investors might be cautious in a hypercompetitive industry like coffee. While the Starbucks brand has distinguished itself in the coffee market, most coffee houses are independents or smaller chains that are not well suited for public markets.

Still, over the last few years, one competitor has emerged from obscurity and is rapidly marching across the country in a regional-to-national expansion. As it continues making a dent in the market, Dutch Bros (BROS 0.07%) could be an undervalued coffee stock that amounts to a second chance for those who missed the Starbucks growth story.

The evolution of Dutch Bros

Dutch Bros has existed since 1992, but its expansion was not rapid at first.

That situation meant it was not as well known as some private chains such as Dunkin', and in many ways, it did not stand out from other privately held chains such as Peet's Coffee or Scooter's Coffee. At the time, Dutch Bros expanded through franchising and private equity investments.

That changed when Dutch Bros launched its initial public offering initial public offering (IPO) in September 2021. At the time of the IPO, Dutch Bros operated 470 shops in 11 states. As of June 30, it has nearly doubled in size, expanding to 912 locations in 18 states. Given the rapid growth, it is on track to eventually become a nationwide chain.

Additionally, it differs from Starbucks in that it operates only drive-thru shops, meaning it does not have to spend to maintain inside seating areas. Also, it stands out with the variety of beverages. Its signature Dutch Classics are coffee drinks based on espresso and half-and-half, but customers can also choose from teas, lemonades, smoothies, and energy drinks.

Finances and stock price growth

The rising popularity of those beverages helped it earn $600 million in revenue in the first half of 2024, rising 34% year over year. Same-shop sales surged 4% higher during that time, indicating most of that increase came from its expansion.

Costs and expenses grew at a slightly slower 27% rate. Dutch Bros also reduced interest expenses and drew income from other sources. Thus, net income was $19 million in the first two quarters of 2024, up from a $1 million loss during the same period in 2023.

Admittedly, investors have struggled with this stock at times, and its current price of $32 per share is only a modest increase from the $23-per-share IPO price from three years ago. Moreover, stock price growth is flat on the year, indicating a relative lack of enthusiasm after the stock price plunged in early 2022 following its early post-IPO gains.

However, investors should keep in mind that the company's aforementioned shop growth continued without interruption as the stock struggled. Moreover, the P/E ratio is probably not representative of its true valuation due to its recent profitability; its 2.3 price-to-sales (P/S) ratio is well below Starbucks' sales multiple of 3.

Furthermore, unlike Starbucks, Dutch Bros has not yet saturated the country and does not have to look to international markets to drive its massive growth. Since smaller companies can achieve higher percentage growth rates more easily, Dutch Bros has advantages over its much larger competitor.

Consider Dutch Bros stock

Investors should consider Dutch Bros stock amid its low valuation and discounted stock price.

Indeed, the coffee market is highly competitive. Nonetheless, Dutch Bros differs from numerous coffee chains in that it launched an IPO and combined that with an ambitious plan for nationwide expansion.

Despite its successes, the stock has done little since it fell back after a post-IPO surge. Still, the company continues to expand rapidly, grow revenue at a brisk pace, and now, earn a profit. Ultimately, these attributes are going to make it harder to ignore.

Right now, Dutch Bros trades at a lower P/S ratio than Starbucks despite its advantages. Knowing that, investors should consider buying shares before its stock price growth catches up to the development of the business.