Nervous Market, Big Opportunity: The 1 Beaten-Down Growth Stock I'd Buy With $500 Right Now

Sometimes, stellar growth isn't enough. Shares of Dutch Bros (NYSE: BROS) have plummeted 60% since peaking early last year. There are plenty of good reasons for an investment to fall out of favor, but you can't question the beverage chain's octane.

Dutch Bros continues to draw a crowd. It's expanding its empire of small-box stores serving handcrafted drinks at a heady pace. The concept has ample runway early in its timeline before it saturates the market. Let's start with the challenges that Dutch Bros is currently facing before turning to the opportunities.

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Leaky cups can be messy

Investors were smitten with Dutch Bros and its growing appeal to consumers of all ages. Its original coffee beverages drew drive-thru commuters in the morning. Its flavored energy drinks and creative sugary concoctions attracted high schoolers and sometimes their parents after school.

Dutch Bros remains popular. Wall Street has changed. The same investors who cheered expansion at the expense of near-term profitability are now more picky about the premium valuation the chain commands.

It also doesn't help that the competitive landscape is intensifying with other beverage stocks making moves. Starbucks (NASDAQ: SBUX) has boosted its offerings to match some of Dutch Bros' colorful and creative fare. Even fast-food chains have made the beverage category a focus to boost their average transaction sizes.

The bullish case that follows should show how Dutch Bros would need to more than double from today's price to get back to its level in July of this year. The shares would have to jump almost 150% to reach last year's all-time high. The bearish counter is that the stock continues to trade at a market premium even after the deluge of downticks. Dutch Bros currently trades at 45 times trailing earnings, a rich multiple amid competitive pressures and potential concerns about consumer spending.

I'll drink to that

Big chains are eyeing the Dutch Bros blueprint. Smaller copycats are making regional inroads. It doesn't mean that Dutch Bros is getting squeezed out. It just posted 30% revenue growth in its latest quarter.

The market hated that report, but more for the same reasons that have dogged the stock in recent months. Dutch Bros is ramping up its capital expenditures to open more stores. It will open 250 new locations in 2027, up from 185 it should introduce this year. This comes at the expense of near-term adjusted margins.

Expansion activity continues to be the largest contributor to top-line growth, but the concept still works. Comps rose 4.5% systemwide in the third quarter, with company-owned locations rising slightly more. It's not just inflation at work. The number of transactions at company-owned stores has risen for nine consecutive quarters.

With others catching on, it makes sense to step on the accelerator in the build-out. Dutch Bros has a goal of 2,029 stores by 2029. It's at just 1,273 units today. Its long-term target calls for 7,000 locations.

Dutch Bros is a winner, despite the recent stock chart. It has delivered 19 consecutive years of positive comps. Its net margin remains lower than Starbucks, but that speaks more to the ceiling than the floor here.

In the meantime, Dutch Bros is now trading for less than 30 times next year's profit target. Go out another year, and the multiple drops to 23. The stock's not cheap, but not as rich as some of its beverages. It's on my short list of stocks to buy for my next investment, even if it's not the market's cup of energy tea.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Dutch Bros and Starbucks. The Motley Fool has a disclosure policy.