Why billionaires are choosing Dutch Bros over Starbucks: A new investment trend?

A growing number of billionaires are shifting their investments from Starbucks Corp (NASDAQ: SBUX) to its lesser-known competitor, Dutch Bros Inc (NYSE: BROS).

This trend has raised eyebrows in the investment community, especially after Starbucks recently appointed industry veteran Brian Niccol as its new CEO.

While Starbucks remains a giant in the coffee industry, influential hedge fund managers and investment titans are increasingly betting on Dutch Bros. But should you follow their lead?

Why are billionaires backing Dutch Bros?

Some of the most prominent figures in finance, including Paul Tudor Jones, Steven A. Cohen, and Larry Fink of BlackRock, have recently increased their stakes in Dutch Bros.

Jones and Cohen have raised their investments in BROS by 82% and 90%, respectively, while Fink has made an even bolder move, increasing his position by 177%.

These significant investments suggest that these billionaires see substantial growth potential in Dutch Bros, even after the stock experienced a 20% drop in early August.

The timing of these investments is noteworthy.

Despite the recent sell-off, Dutch Bros managed to beat Wall Street expectations in its fiscal Q2 results on August 7th.

The bullish moves by these financial heavyweights indicate that they view the dip as an overreaction and are confident in the company's prospects.

Is Dutch Bros better than Starbucks?

Dutch Bros presents a distinct alternative to Starbucks, offering a more laid-back and approachable atmosphere compared to Starbucks' upscale vibe.

This strategy allows Dutch Bros to keep its prices competitive, appealing to budget-conscious consumers who are wary of spending amid concerns about a potential economic slowdown in the United States.

In February 2023, Dutch Bros appointed Christine Barone as its CEO, a move aimed at driving the company’s next phase of growth.

Under Barone’s leadership, Dutch Bros reported a 4.1% year-over-year increase in same-store sales, achieved a record $2 million in average sales per store, and improved store margins by 50 basis points in its most recent quarter.

Additionally, the company opened 36 new stores in Q2, signaling aggressive expansion efforts.

While Dutch Bros is making impressive strides, it’s worth noting that it does not currently pay a dividend, which might make Starbucks a more attractive option for income-focused investors.

Piper Sandler's caution on Dutch Bros

Despite the enthusiasm from billionaire investors, not everyone is as bullish on Dutch Bros.

Piper Sandler analyst Brian Mullan recently downgraded Dutch Bros stock to a "neutral" rating, lowering his price target from $41 to $36.

Mullan’s revised target still suggests a potential upside of about 10% from current levels, but he believes that the risk/reward profile is now balanced.

In his research note, Mullan expressed confidence in CEO Christine Barone's leadership and acknowledged potential future sales growth driven by Dutch Bros’ Mastery of All Operations and Production (MOAP) initiative, expected to make an impact around 2025.

However, his caution suggests that while Dutch Bros has strong growth potential, there are risks that investors should consider.

The shift in billionaire investments from Starbucks to Dutch Bros underscores the dynamic nature of the coffee industry and the growing competition Starbucks faces.

Dutch Bros is carving out a niche for itself with its unique brand and aggressive expansion strategy, making it an intriguing option for growth-oriented investors.

However, as Piper Sandler’s downgrade highlights, Dutch Bros is not without its challenges.

For investors, the decision between Starbucks and Dutch Bros may come down to risk tolerance and investment goals.

While Starbucks offers stability and dividends, Dutch Bros presents a higher-risk, higher-reward opportunity with strong growth prospects.

As billionaires continue to back Dutch Bros, the coffee chain’s trajectory will be one to watch closely.