Instead, consider this magnificent coffee stock

Dutch Brothers (NYSE:BROS) is getting a lot of attention these days. And it makes sense that she’s the reason. While shares are down 45% from their peak (as of June 27), they’re up 79% over the past nine months — a strong momentum that’s continued throughout 2024.

This might come as a shock, but I think investors would be better off forgetting about Dutch Bros. There is another magnificent coffee broth this should be purchased instead.

Optimism around Dutch Bros

Investors were certainly pleased when Dutch Bros. reported its first-quarter 2024 financial results in early May. Revenue increased 39% year over year, with same-store sales up an impressive 10%. The company also reported an operating profit of $25.6 million, much better than last year’s loss of $232,000. All signs point to a company experiencing strong consumer demand, which translates into strong financial results.

Dutch Bros.’s market capitalization currently stands at $6.5 billion. But the company the most optimistic supporters I think this figure will be several times higher in the future.

The growth prospects are very promising. The key to Dutch Bros’ strategy is to open new stores aggressively. After opening 159 new stores in 2023 and 45 in the first three months of this year, the total stands at 876. Executives estimate that over the next 10 to 15 years, Dutch Bros’ presence could reach 4 000 stores.

This huge potential is precisely what excites investors. If the company even remotely approaches this figure, revenues will be significantly higher.

The market loves a good growth story. Dutch Bros shares are trading with a nosebleed Forward Price-to-Earnings (P/E) Ratio of 113.5. To me, this more than fully reflects the optimism surrounding the company.

Pessimism around Starbucks

But Dutch Bros’ long-term success is far from guaranteed. And the current valuation leaves no room for error. I’d rather not take that bet.

Instead, I think it’s a smarter idea to consider buying shares in Starbucks (NASDAQ:SBUX). The stock is down 37% from its high and now trades at a very reasonable forward P/E multiple of 22.1.

With Dutch Bros, investors need to worry about execution risk. Any management team can set an ambitious store goal. However, the extremely competitive nature of the restaurant industry means that Dutch Bros will struggle to achieve its goal.

In contrast, Starbucks already dominates the sector, with its 16,600 stores in the United States and 38,951 total worldwide. The only criticism investors have about the company is that it’s going through a tough time, with same-store sales declining 4% in the second quarter of fiscal 2024 (ended March 31). In a challenging macroeconomic environment, consumers may be reluctant to pay more for Starbucks drinks.

However, the company has a powerful branda competitive moat that Dutch Bros. is no match for. It has historically given Starbucks enormous consumer mindshare and pricing power, not to mention helping the company develop a best-in-class technology base and loyalty program.

The struggles may continue for the near future, but I expect Starbucks to eventually post healthy sales and profit growth at the same stores. This opinion is supported by the company’s expansion potential.

Management plans to open 3,400 new stores in the United States over the long term. That’s about the same number Dutch Bros wants to open. This means that Dutch Bros will likely have to compete with Starbucks for attractive premises or to hire talented employees. The Seattle-based chain has significantly greater scale and financial resources to execute its growth strategy better than its smaller rival.

And that’s why it’s the smartest stock to buy, in my opinion.

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

Before buying Dutch Bros stock, consider this:

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool posts and recommends Starbucks. The Motley Fool has a disclosure policy.

Forget Dutch Bros: Consider Instead This Gorgeous Coffee Stock was originally published by The Motley Fool