I'd Buy This Growth Stock After Its 35% Plunge

One of my favorite beaten-down growth stocks to buy right now is Dutch Bros (NYSE: BROS). The coffee shop operator has been hitting on all cylinders, but its stock is now about 35% off its highs. I own shares at a cost basis just below where the stock is currently trading and think this is a great entry point for new investors.

Long runway ahead

Dutch Bros is a classic regional-to-national expansion story. Its roots are in the Northwest U.S., but it's been gradually expanding eastward. It recently went further east when it acquired the North and South Carolina chain Clutch Coffee Bar and converted its shops into Dutch Bros locations. The initial response has been positive, with the first seven converted shops seeing average unit volumes (AUVs) triple their pre-conversion volumes and score higher than the company's systemwide AUVs. This is a good indication of the brand momentum that Dutch Bros has, even in markets further away from its base.

Despite a tough consumer environment, Dutch Bros has consistently been seeing strong same-store sales growth. This continued in the first quarter, when the company reported an impressive 8.3% increase in comparable-store sales with a 5.1% increase in transactions. Company-owned stores performed even better, with same-store sales up 10.6% on a 6.9% rise in transactions. The growth was driven by drink innovations, including limited-time offerings (LTOs), and by mobile order-ahead.

The company is also getting a lift from the introduction of hot food items, with the 485 stores offering the new menu items seeing about a 4% same-store sales boost. Dutch Bros thinks that three-quarters of its shops can physically support its hot food offerings, which would be about 880 locations based on its current store count. However, newer stores will be built with food in mind, so this percentage should rise over time.

Image source: Getty Images.

Backed by strong sales momentum, Dutch Bros has a big expansion opportunity in front of it. It thinks it can reach 2,029 locations by 2029, up from 1,177 at the end of Q1, and eventually support 7,000 shops across the U.S. That number seems more than reasonable, considering that rival Starbucks has nearly 17,000 stores in just the U.S. and nearly 18,400 in North America.

Dutch Bros stores have a small footprint, typically with two drive-through lanes and no indoor seating. This makes them cheap to build and operate compared to Starbucks. Despite the small physical size, they have AUVs on par with Starbucks and have higher store-level margins. This sets the company up to be highly profitable down the road, when it can spread corporate costs across a wider store base.

Meanwhile, the stock is reasonably valued, trading at a similar price-to-sales (P/S) multiple as Starbucks despite its much larger growth runway. With the stock trading at a reasonable value and a huge growth runway ahead, I'd be buying this growth stock at these levels.

Geoffrey Seiler has positions in Dutch Bros. The Motley Fool has positions in and recommends Dutch Bros and Starbucks. The Motley Fool has a disclosure policy.