We came across a bullish thesis on Dutch Bros Inc. (BROS) on The Finance Corner’s Substack by Kostadin Ristovski, ACCA. In this article we will summarize the bulls’ thesis on Dutch Bros Inc. (BROS) share was trading at $34.01 as of Sept 13th.

A close up of a barista pouring freshly made coffee to a happy customer in a cafe.

Dutch Bros has attracted considerable attention due to its impressive location growth. Originally a small pushcart selling espresso drinks in 1992, it has since expanded to over 900 locations, prompting comparisons to Starbucks. However, Dutch Bros' success stems from its unique approach: over 90% of its business is conducted through drive-thrus, allowing for smaller, more efficient shop designs. The company’s revenue mix is diversified, with 50% coming from coffee sales, 25% from energy drinks (including its proprietary Blue Rebel), and 25% from other beverages like teas and sodas. A key element of its model is an internal franchising system introduced in 2008, requiring franchisees to have worked at the company for at least three years. This has led to fewer closures, with only one permanent location closure in the last five years. Today, franchises account for about a third of Dutch Bros locations. The management anticipates a more capital-efficient expansion, with a stronger new shop return expected after 2025.

The company’s growth will be driven by three factors: the number of locations, product introductions, and inflation. Management aims for over 4,000 locations, a significant increase from the current 912, representing about 10% of Starbucks' total footprint. While this target might take 10-15 years, the lack of international expansion plans keeps the focus on key markets. Introducing new products may not significantly boost revenue per location, as historical data suggests that new offerings often cannibalize existing sales. Inflation, while outside the company’s control, is expected to contribute to revenue growth as costs are passed on to consumers.

Financially, Dutch Bros has seen consistent revenue growth, though margins have fluctuated. A significant margin drop occurred during the COVID-19 pandemic due to rising rents and increased direct costs. However, since 2022, gross margins have stabilized, and economies of scale have improved operating margins. Management targets a 30% adjusted EBITDA margin, translating to around 18% operating margin, slightly higher than Starbucks. Based on a more conservative 16% margin assumption, Dutch Bros is fairly valued at around $32 per share, close to its current price of $29. However, if management can achieve the higher 18% margin target, the fair value rises to over $35 per share. This implies Dutch Bros is currently undervalued, and the stock has significant upside potential if the company can execute its growth strategy and expand its margins as planned.

Dutch Bros Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 37 hedge fund portfolios held BROS at the end of the second quarter which was 33 in the previous quarter. While we acknowledge the risk and potential of BROS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BROS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.