Starbucks made big news last week with its poaching of Chipotle Mexican Grill‘s superstar CEO Brian Niccol. Starbucks stock shot up more than 20% after the announcement, and it was a shot of caffeine that the coffee king has been desperately needing.
Investors have confidence in Niccol’s ability to get Starbucks back to growth, but it’s somewhat premature. He’s not even starting until September, and it’s going to take a few quarters at the very least to demonstrate results from whatever new changes he implements.
But there’s another coffee chain that’s been catching billionaire investors’ attention, and that’s newbie stock Dutch Bros (NYSE: BROS). Let’s see who’s buying and if you should follow their lead.
Billionaires are betting on cheap coffee
Asset management firms with at least $100 million in assets need to file a 13F form with the Securities and Exchange Commission (SEC) quarterly, in which they detail their trades. Investors are always on the lookout for what moves billionaire investors are making, and Warren Buffett’s 13F filing, the most recent of which was released this past week, makes headlines.
But there are plenty of other highly watched billionaire-run firms, and several prominent ones recently bought Dutch Bros stock. Some of these include:
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Larry Fink of Blackrock: increased position by 177%.
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Steven A. Cohen of Point72 Asset Management: increased position by 90%.
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Paul Tudor Jones of Tudor Investments: increased position by 82%.
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Steven Schonfeld of Schonfeld Strategic Advisors: initiated a new position.
It’s not just the coffee that’s hot
What’s so exciting about Dutch Bros? A lot, actually. Don’t let the Dutch name confuse you — it’s the modern take on the American coffee shop, with a home-grown, down-to-earth feel. The culture is friendly and community oriented, and the service is customer-centric and fast. In many ways, it’s like the polar opposite of Starbucks’ premium, sophisticated, urban vibe, and this atmosphere is resonating with millions of Americans who are lucky enough to be in close proximity to a Dutch Bros shop.
The most important piece of a viable business is having a well-liked product, so Dutch Bros checks that box. After that, it needs a solid management team that can turn it into a scalable business, and after initial success with its founder-led team, it’s hired a completely new C-suite to take it to the next level.
So far, so good. Revenue increased 30% year over year in the second quarter of 2024, driven by new-store growth and a 4.1% increase in same-shop sales. The company-operated, shop-contribution margin continues to expand, up 0.5 points from last year to 30.8%.
Last year, it was still going back and forth between losses and positive earnings, but Q2 was the second straight quarter of positive-net income, which increased from $9.7 million to $22.2 million.
Near, but not flawless
There has been some pressure at Dutch Bros, but it’s also operating in a precarious environment. It does benefit from having cheaper prices than Starbucks, since people who want to spend on coffee might choose the lower-priced alternative. But in general, when shoppers are being careful about spending, they might rethink the need for a customized beverage altogether.
Since Dutch Bros is opening up new stores so quickly, it does have the edge of being able to count new stores in its revenue growth. Comparable-store growth has slipped, but it’s still better than it was a year ago. It does seem to be doing quite well considering the external headwinds, but the operating environment makes it more difficult to discern what’s coming from the company and what’s coming from outside factors.
Yup, I’d follow the billionaires into Dutch Bros
I often remind investors that billionaire asset managers are often investing billions of dollars for their hedge funds, and their trades take that into account. They need to maximize short-term gains as part of their work, so their strategies are fundamentally different from those of the average individual investor.
However, Dutch Bros looks like it could be a fabulous long-term holding for the average investor as well. These billionaires all bought Dutch Bros in Q1, and it’s plunged since then based on the near-term restaurant-spending outlook. I wouldn’t be surprised if many of them continued to splurge on Dutch Bros stock recently at its new, lower price, and long-term investors with at least some appetite for risk could feel comfortable following these billionaires into a position in Dutch Bros stock.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Dutch Bros and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Forget Starbucks: Billionaires Are Buying Up This Coffee Chain Stock Instead was originally published by The Motley Fool
