Dutch Bros Could Rise 18% More Despite Post-IPO Price Gains

Dutch Bros (NYSE:BROS) went public on Sept. 14 at $23.00 per share and immediately spiked to $43.32 as of Sept. 30. That is a gain of more than 88.3% and has led some to argue that BROS stock is overvalued.

I looked at some of the numbers in the initial public offering (IPO) prospectus, and I am not convinced. I suspect there could be a higher price for the stock sometime in the next 12 months.

One reason I think BROS stock is not overvalued is that the enterprise value (EV)-to-sales ratio is about 15 times sales. For many growth stocks, that is not that high a multiple.

Dutch Bros Growth

Dutch Bros is clearly on a growth trajectory. For example, in 2020, the company made $327.4 million in revenue. However, it brought in $404.5 million in revenue for the 12 months ending June 3. That is a gain of 23.5% on an annual basis just within six months. These figures can be seen on page five of its recent IPO prospectus.

Moreover, its adjusted EBITDA has been growing nicely. This is a form of cash flow that helps us understand its underlying business.

For example, in 2020, Dutch Bros made $69.8 million in adjusted EBITDA. By June 30, it had made $80.1 million in the prior 12 months. That represents annualized growth of 14.8% within six months.

Moreover, page 29 of the prospectus shows the operating company called Dutch Bros Opco grew its revenue 51% in the last six months. It increased from $150.9 million last year to $228 million for the six months ending June 30.

The underlying business is on a tear. That deserves a high valuation.

Valuing Dutch Bros Stock

Right now, there are no analyst projections for the company. But we can use a simple compounding factor to project the revenue. For example, if the company can grow its revenue by 40% over the next three years, it will reach $1.1 billion by June 30, 2024.

This is due to the power of compounding high growth rates. For example, if one compounds 40% over three years, the result will be 2.744 times the base number for $404.5 million.

Currently, Dutch Bros has 163.234 million shares outstanding, as seen on page 22 of the prospectus. After adding in 3.158 million shares from selling brokers, the total number of Class A equivalent shares outstanding is 166.392 million. Therefore, at $43.32, Dutch Bros has a market capitalization of $7.208 billion.

That means by June 2023, three years from now, BROS stock has a price-to-sales (P/S) metric of just 6.449 times sales. This is seen by dividing its $7.2 billion market value by the $1.1 billion in sales it could see in three years.

What BROS Stock Is Worth

Moreover, the company raised $515 from the IPO according page 22 of the prospectus. After $7 million in expenses, it will have $508 million in cash.

Dutch Bros also had $198 million in senior secured debt and $25 million in revolving debt based on page 64 of the prospectus. Therefore, it has net cash of $285 million. That lowers its enterprise value to just $6.923 billion.

As a result, the stock has an EV-to-sales multiple of just 6.29 by June 2024. That is probably too cheap. At 10 times EV-to-Sales, its EV would be $11 billion. After you add back the net $285 million in cash, its market cap would be $11.285 billion.

Now, $11.285 billion is 56.5% higher than today’s market capitalization. However, we must first bring the future value of $11.285 billion for Dutch Bros back to the present using a discount rate. For example, a 10% discount factor over three years works out to 75.13%. That lowers the future value to $8.478 billion.

This implies that Dutch Bros stock is worth 17.6% more (i.e., $8.478 billion divided by $7.2 billion). Therefore, BROS stock has a target price 17.6% higher than its $43.32 price as of yesterday, which amounts to $50.94.

So, for those investors who think the stock is too high, consider its growth rate and look forward a bit. My best estimate is that it’s worth almost 18% more at about $51 per share.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.