Investors saw a lot to like in the latest earnings report from Dutch Bros (BROS -1.08%). The company reported better-than-expected results in the third quarter, and management raised guidance for the full year. At the time of writing, the stock is up 39% since the report was released on Nov. 6.
On the surface, Dutch Bros stock might appear expensive, recently trading at a price-to-earnings ratio of 169, but that valuation metric is misleading considering the company's early stage of growth. A closer look reveals its valuation might not be all that expensive. In fact, the stock may have room to run in 2025.
Here's why investors might want to consider adding shares to their portfolio if they haven't already.
Dutch Bros is settling into a steady pace of growth
Dutch Bros continues to execute well against its long-term growth strategy. It has been very consistent in opening 30 or more shops each quarter, and this has kept its quarterly year-over-year revenue growth at around 30% over the last year. In Q3, revenue growth ticked down to 28% year over year.
Restaurants can open as many locations as they want to drive revenue growth, but what matters is customer traffic from existing stores. On this score, Dutch Bros is also performing well. It experienced choppy same-shop sales results during 2022, a measure of growth the company applies to locations that have been open for at least 15 months, but since Q1 2023, same-shop sales have increased for seven consecutive quarters, with a 2.7% year-over-year increase in Q3.
Based on the momentum, the company now expects same-shop sales for 2024 to be up around 4.25%, an improvement over the previous guidance that called for a low-single-digit increase. The company appears to be hitting its stride once again after reporting its highest level of transactions in two years.
Dutch Bros has untapped opportunities for growth
Dutch Bros operates less than 1,000 shops in only 18 states. There is tremendous potential for growth, but importantly, the business has just started to roll out some initiatives that can drive higher growth from its current locations.
For example, Dutch Bros recently launched mobile ordering across 90% of all shops. Customers using mobile ordering have placed 2.8 million transactions through Oct. 31, which is a sign of strong adoption and customer satisfaction.
The growth of the Dutch Rewards program is another opportunity, which has had an impact on transaction growth. The rollout of mobile ordering is driving an acceleration in new reward registrations, which could further boost same-shop sales over the next year.
The stock has room to run
The single most important aspect of Dutch Bros' strategy is that it is opening new shops while reporting a profit. Net income was $21.7 million, up from $13.4 million in the year-ago quarter. The improving profit margin explains why investors are starting to pay a higher price-to-sales (P/S) ratio for the shares.
Despite the stock's sharp rise, its P/S ratio is still at the low end of other leading restaurants. Dutch Bros shares trade at a P/S ratio of 3.81, compared to 3.15 for Starbucks, but significantly below Chipotle Mexican Grill's 7.44 and Cava's 20 P/S multiple.
I believe Dutch Bros stock is starting to get the valuation it deserves based on its current rate of growth and long-term prospects. This means investors can expect the shares to continue climbing on par with the company's underlying growth, which could lead to exceptional returns as the business keeps expanding its shop footprint.
