The market is officially back in bull territory according to all definitions. That’s exciting for investors because bull market conditions mean average stock values are growing. But it’s important to keep that word “average” in mind, because while a rising tide lifts all ships, some go higher than others, and there are always a few that sink.
Toast (NYSE: TOST) and Dutch Bros (NYSE: BROS) are two hot stocks that should soar as the market leans more favorably toward growth stocks. If you learn more about them, you’ll understand why.
1. Toast: Bringing restaurants into the digital age
Just when you thought there were no more industries to disrupt, Toast aims to turn running a restaurant into a modern, tech-based business. It offers comprehensive solutions, including hardware and software, with services like payment processing and online ordering. It customizes its packages to restaurant type and offers varied tiers.
Restaurants are signing up in droves, and Toast says it has an edge over its competition because its technology works exclusively for the restaurant industry, unlike competitors that serve many industries.
These kinds of solutions can make a restaurant work much more efficiently, and growth has been incredible. Annualized recurring revenue, which takes into account the subscription model and is what Toast uses as its top-line growth metric, increased 40% year over year in the 2023 third quarter. The company added 25,000 restaurants to its roster over the past year, bringing the total to 99,000, and it says that is a tiny fraction of its serviceable market.
Toast stock is down 24% over the past year despite its high growth and large opportunity. Investors seem disappointed in its profitability. However, it’s been improving. Gross profit improved 50% in the third quarter over last year, and net loss contracted from $98 million to $31 million.
In bull markets, investors tend to be more forgiving toward unprofitability. They focus more on opportunity and driving growth. That’s good for Toast stock and its shareholders. At the current price, Toast stock trades at a price-to-sales ratio of 2.5, which is very reasonable for a company reporting such high growth in sales. Toast stock could soar as the economy improves, and it could handle an increase in valuation.
2. Dutch Bros: A fun take on coffee
If you think Starbucks has made it impossible for other coffee chains to rise up, you’ve never had the chance to drink a Dutch Bros Annihilator. That wouldn’t be surprising, since it operates fewer than 800 stores in total — and only in 16 states. However, it has broad ambitions and is rapidly expanding. In the regions where it operates, it has forged high loyalty, indicating that it has a viable business that could grow for a long time.
Revenue increased 33% year over year in the 2023 third quarter, and it has delivered impressive growth over the past few years, including through the pandemic.
Dutch Bros plans to open about 150 stores annually, and sees the opportunity for at least 4,000 new stores over the next eight years or so. As it moves across the country, it’s developing a strong brand presence, and as it scales, it’s growing into a formidable restaurant chain. To do this effectively, the founder-CEO is stepping down and making way for Christine Barone, a seasoned food executive, to bring the company into its next growth phase.
One problem Dutch Bros has been having is generating higher same-store sales. That’s likely due to economic headwinds, and the company also says it’s a result of a growth strategy it uses that involves opening many stores in one market to grab attention and establish itself. That leads to higher overall sales but can hurt same-store sales growth in the short run.
One place where it’s demonstrating strength is profitability. Dutch Bros has successfully raised prices to offset increased costs, and the company-operated shop contribution margin widened from 25.6% last year to 31% this year in the third quarter. It has also posted two consecutive quarters with net profits.
Dutch Bros stock trades at a price-to-sales ratio of 1.7. The company has a long growth runway, and the stock could soar in this bull market.
Should you invest $1,000 in Toast right now?
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks and Toast. The Motley Fool has a disclosure policy.
Bull Market Buy: 2 Hot Growth Stocks to Buy Before They Skyrocket was originally published by The Motley Fool