Decrease in Growth Stock by 36%, Lovely Opportunity for Purchase Immediately
The S&P 500 has climbed an impressive 25% this year and keeps hitting new peaks. It's a moment of economic faith and anticipation for the future. Nevertheless, this rising trend makes it increasingly challenging to uncover fantastic investment opportunities in the market. As the market ascends, valuations are starting to appear overpriced.
Warren Buffett, in his timeless investment wisdom, advises purchasing stellar businesses at reasonable prices instead of buying decent businesses at attractive prices. Investors should heed his guidance and consider investing in those outstanding businesses that trade at reasonable prices instead of focusing on exceptional deals. Over time, your investments in such companies could experience significant growth.
For instance, consider the coffee chain, Dutch Bros (BROS 0.26%). Dutch Bros stock remains 36% less than its peak price, and it boasts a reasonable valuation at this moment. Yet, it's showing tremendous potential, and this presents an optimal buying opportunity.
Satisfying caffeine cravings
Dutch Bros continues to thrive despite operating only 950 stores across 18 states, far from being present in all U.S. states. Nonetheless, it's expanding at a rapid pace, and it's managing to gain followers in various regions beyond its West Coast basis. In Q3 2024, it opened 38 new stores and targets 150 new outlets in 2024. Long-term, it aims to establish 4,000 stores across the next 10 to 15 years.
It distinguishes itself from other coffee chains like Starbucks by offering a unique twist on coffee. Through years of refining its image and maintaining a laid-back, enjoyable culture, lower prices, and swift service, it delights its customers.
As a young, growing enterprise, it consistently achieves higher sales in each quarter, thanks to a mix of new stores and increased same-store sales. New store initiatives have been taking the limelight recently due to inflation's impact on consumers' wallets. Consequently, there's been some pressure on same-store sales. However, Dutch Bros' more affordable pricing can attract more customers to its outlets.
In Q3 2024, quarterly sales rose 28% year-over-year, while same-store sales increased 2.7%. The three-month period witnessed the highest growth in same-store transactions in two years, driven by higher comp sales and increased pricing. Consequently, more customers are purchasing more frequently, which signifies a substantial gain for the company.
Making the dream a reality
Young, high-growth stocks are often perceived as risky to investors. If they're just starting out and yet to become profitable, they could fail, and you might lose your investment even if the concept is brilliant.
Dutch Bros is demonstrating its potential to transform from an attractive notion to a profitable business. It has reported profitability on a generally accepted accounting principles (GAAP) basis in several quarters and is experiencing continued profit growth. Beyond simply being a trendy product, it's one that can generate profits. Of course, the market will respond favorably, and Dutch Bros stock is up 77% over the past year.
In the third quarter, it disclosed $21.7 million in net income, a significant increase from $13.4 million in the previous quarter. Adjusted earnings per share (EPS) of $0.16 surpassed Wall Street's expectations of $0.12.
Dutch Bros isn't just achieving profitability but also ensuring its growth is outpacing capital expenditures required for this expansion. The company is meticulously growing, ensuring that its winning formula is consistently implemented in every new store and that each new outlet is properly vetted for optimal performance.
Dutch Bros fell short of investors' expectations during the previous quarter when it announced restrained full-year store opening plans. However, this was due to a reorganization of real estate assessment, not because it was prioritizing store growth over value creation. In fact, this new real estate strategy is already yielding enhanced results, and slower growth means better, more profitable growth. It's the right approach.
Timing the market is an illusion
Dutch Bros stock soared an impressive 40% following the report and continues to surge. As we speak, it trades at a forward, 1-year price-to-earnings (P/E) ratio of 87. That's indeed rich. Is it warranted? Additionally, it trades at a price-to-sales (P/S) ratio of 3.8, which can be considered reasonable. Therefore, it's essential to look at valuations from various perspectives.
If you can visualize where Dutch Bros stock could be in five years, this might be a reasonable price to pay, and it could be the perfect time to invest. You can always wait for a better entrance point or for a market correction. Or, you can purchase now, unwind, and reap the rewards in a few years.
Investors seeking reasonable investment opportunities in the current market climate might consider Dutch Bros, as its stock is currently 36% less than its peak price and demonstrates substantial potential for growth. Due to its reasonable valuation, Dutch Bros could be an attractive option for those following Warren Buffett's advice of investing in stellar businesses at reasonable prices.
As Dutch Bros continues to expand and gain followers, its profitability is also on the rise. In Q3 2024, the company reported a significant increase in net income and adjusted earnings per share, surpassing Wall Street's expectations, indicating its potential to transform from an attractive notion to a profitable business. With its ongoing expansion and enhanced real estate strategy, Dutch Bros is growing at a strategic pace, ensuring profitable growth and optimal performance in each new store.
