Regarding coffee stocks, Starbucks (NASDAQ:SBUX) set the bar very high. Even if you bought the stock in early 1995 (a few years after its IPO), you could realize a gain of over 10,000% if you still held the stock. This is the type of feedback that can prepare you for life.

The next coffee title trying to imitate Starbucks’ success is Dutch brothers (NYSE: BROTHERS)which is just a few years away from its IPO in September 2021. Let’s see if this stock has the same potential to prepare investors for life.

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Is Dutch Bros the next Starbucks?

Although both companies operate cafes, their concepts are very different. Starbucks has always aimed to be a premium coffee establishment with a local coffee shop vibe and aesthetics, service and pricing to match.

In this regard, Dutch Bros is not trying to be the next Starbucks. Its locations generally do not have places to enter and sit. Instead, the company focuses largely on drive-thru delivery of its drinks and, unsurprisingly, its prices are generally cheaper.

Today, most newer Dutch Bros stores are between 800 and 1,000 square feet and offer a walk-up window and multiple drive-thru lanes served by a single window. The old stores are only about 500 square feet with two drive-thru lanes on each side. The company also has a few larger end locations, around 1,200 square feet; these locations often include a lobby, but generally do not have indoor seating.

However, the two companies have one thing in common: the traditional cup of coffee is not their biggest seller. In recent years, cold drinks have accounted for approximately 75% of Starbucks beverage sales. For Dutch Bros, around 50% of sales are coffee-based, but this includes refined cold coffee drinks. About 25% are its proprietary Blue Rebel energy drinks; the rest is a mix of “teas, lemonades, sodas and smoothies.” Hot coffee only accounts for about 16% of beverage sales.

Now Dutch Bros also has some growth opportunities to follow in Starbucks’ footsteps. One of them is food, which currently accounts for about 2% of Dutch Bros’ sales, although the company has recently been testing more items in a few select locations. Starbucks, meanwhile, made 23% of its sales from food in its most recent fiscal year (ended September 29).

Online ordering is another area. While Starbucks has certainly had some issues with its online ordering platform, digital ordering has been a growth driver in the quick service restaurant (QSR) industry. As such, this should be another great growth opportunity for Dutch Bros.

The biggest opportunity for Dutch Bros, however, is expansion. At the end of last quarter, the company had 950 locations, of which 645 were owned. The group plans to expand to around 4,000 stores over the next 10 to 15 years. Starbucks, at the end of its most recent quarter, had 18,424 stores in North America alone, 11,161 of which were company-operated. This shows the long runway of expansion opportunities for Dutch Bros.

Given the relatively small size of its stores and the lack of seating areas, developing new stores is not too costly. At the same time, the company generates solid free cash flowwhich allows him to finance the construction of his new store. And despite the small size of its locations, Dutch Bros’ average unit volume (AUV) – the typical amount of sales produced by one of its stores – is around $2 million.

Image source: Getty Images.

The valuation is relatively high

Since Dutch Bros is still in the early days of its expansion, I think it’s best to compare its valuation to that of Starbucks based on price-to-sales ratio (P/S) report. The reason is that as the business scales and its expansion moderates, profitability will increase. So on this front, Dutch Bros trades at 4.3 times sales, while Starbucks trades at 2.8. However, in its early days, it was not uncommon for Starbucks to trade at a P/S of 4 or even higher.

BROS-PS ratio data by Y Charts.

Whether Dutch Bros can become the next big winner in coffee stocks remains to be seen. But the company has many long-term opportunities in food, online ordering and especially expansion.

If the company can quadruple its store base over the next decade, it will become a solid winner. Even if it’s strong growth, it probably won’t be able to generate the kind of returns needed to set you up for life. So overall Dutch Bros looks like a good potential buy, but not a gen.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool posts and recommends Starbucks. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.