Motley Fool Hidden Gems Investing - “The Apple of Public Safety”

Episode Date: February 26, 2025

Axon Enterprise is facing new questions about its competition, but the earnings continue to look strong. (00:21) Jason Moser and Mary Long discuss: - Axon earnings, and the headline that sent the stock down nearly 30% last week. - What artificial intelligence looks like in policing. - What success looks like for TJX Companies. Then, (19:34), Emily Flippen and Ricky Mulvey take a look at Dutch Bros, a fast-growing coffee chain with a sugary valuation. Companies/tickers discussed: AXON, TJX, BROS Host: Mary Long Guests: Jason Moser, Emily Flippen, Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Planet Fitness, a.k.a. Planet Strength. Planet Sweat. Planet Calm. Planet Social. Planet Me Time. And, of course, Planet Value. Whatever you're here for, we're here for it. Judgment free.

Get started at Planet Fitness for $1 enrollment and then $15 a month. $49 annual fee applies. Deal ends September 10th. The party's over for some retailers, but not for all. You're listening to Motley Fool Money. I'm Mary Long, joined today by Jason Moser. J-Mo, thanks for being here. Hey, Mary. Thanks for having me. You know, I'm always thrilled when I get to talk to you on the show, but I especially appreciate you coming on today because you've had quite a busy morning. You were talking to Axon President Josh Isner earlier today. That's probably a good place to start because Axon

dropped earnings yesterday. We're going to air a part of your conversation on Friday's show. But before we dive into Axon's latest results, you want to give us a little teaser, any highlights from your conversation with Josh this morning? Maybe I don't want to give away too much, right? I want people to listen on Friday. But, yeah, look, it's always fun to catch up with Josh. This is the second time we've been able to chat in regard to the company and earnings and strategy and everything that they're doing. I think the enthusiasm behind the opportunities and the enterprise customers, along with their international opportunity, is really exciting. They signed

the biggest deal in company history, actually, with a global logistics provider. And yes, Mary, I did ask who that provider was, and they just won't tell us yet. But that was part of the enterprise opportunity. I thought that was very encouraging. Ultimately, one of the things that stood out to me the most, just the fact that they raised their total addressable market opportunity rather significantly. They typically do it on a two-year cadence, but they did address this in the first quarter of this year because of some acquisitions. They raised that total market opportunity from $50 billion to $77 billion. This most recent quarter that they just reported, they raised that total addressable market opportunity now to $129 billion.

I asked Josh about what was behind that, the drivers, and he told me, but I feel like we're going to have to make people listen to the show on Friday to get a little bit more insight as to why that is. There we go! That's how you do a teaser, J-Mo! Axon is a big name within the Motley Fool stock universe, but there might be some folks listening who are more unfamiliar with the company. Basically, the two-second story is that Axon is developing weapons for law enforcement. Their mission, notably, is to make the bullet obsolete. The technology and weapons that they develop is focused on tasers, on VR technology. I mentioned that earnings came out yesterday for the company after the bell. They beat expectations on the top

line, revenue up 37%. Also on the bottom line, you have gross margin growing by a couple basis points, operating cash flow up 79%. And they also put out strong guidance for the year ahead. You just gave us a little glimpse into your conversation with Josh and hinted at some things to come in the conversation that will air later this week. Anything especially noteworthy from the report itself that you want to call attention to? Yeah, I think you hit on a lot of the great points there just in regard to the growth. I mean, it's just been a very consistent grower, and that's for a lot of reasons. But I thought there were some interesting points to take away from the shareholder letter. They reached a number of milestones this year.

This was their 12th consecutive quarter of 25% or better revenue growth. They broke through the $2 billion in annual revenue barrier, so that's really encouraging. Again, one of the things we love about Axon, there's some certainty there, some reliability in the business model. Annual recurring revenue grew 37% now to $1 billion. So, I think those were the numbers that really stood out to me, along with the fact that their net revenue retention rate of 123%, I mean, that's just consistently a very good number for them. They always report really consistently well on that. And I think that's just indicative of the fact that they're able to not only bring new customers into the fold, but then they do a very good job of growing

the relationship with those customers. Yeah. Let's dive into that net revenue retention rate a bit because at 123%, what that effectively means is that the typical Axon customer is spending 23% more with the company now than they were a year ago. So how is Axon growing that relationship with its existing customers? What exactly is it that those existing customers are spending more on? Well, I've always said, I think that Axon, to me, it's kind of like the Apple of public safety. And I mean that in every good sense. They do a very good job of building great hardware and then iterating on that hardware, bringing out new versions of that hardware, and then selling the software and the services

that come with managing that hardware and all the data that flows through that stuff. And so, when you talk about it, what are these customers spending more money on? Well, I mean, some of these numbers are pretty impressive. Over the course of 2024, they shipped more than 200,000 Taser devices. They shipped more than 300,000 body cameras, along with over 900 million cartridges. And those cartridges are what go to those Taser devices. It's kind of a nice little razor and blade model that we like so much. And then, with the other side of the business beyond the hardware, Axon Cloud Services'

revenue was up 44% to $806 million. They continue to invest in the AI opportunity. I think this is going to be a big part of this company in the coming years. They have this AI era plan that ultimately gives their customers access to all of their current AI developments, along with the future AI developments that they haven't even yet come up with. That was a really encouraging part of the report. They were able to close their first 10 AI-era plan deals in the fourth quarter of the year. Ultimately, that's just another way that they are able to bring customers into the fold and then keep them by continuing to develop new services and additional insights and benefits from being a part of that Axon family.

That AI era plan is interesting to me. In the call, Axon outlined five big innovative leaps that they took in 2024, the first of which was artificial intelligence in policing. I understand the use of virtual reality in law enforcement training, but artificial intelligence in policing itself sounds like something different to me. Axon calls this AI-driven public safety. What does that exactly look like? How does that roll up into this AI era plan that they've outlined? I think that'll be something that we continue to watch develop over the coming years. But again, it goes back to this idea of Axon being two businesses. The hardware, along with all of the software and services that they provide their customers in order to take advantage

of that hardware. While a lot of this is based on this AI era plan, in specific with the AI era plan, there's this DraftOne service, for example, which is like a transcription service for lack of a better term for officers who need to take the audio and video content that they generate from whatever situations in which they're placed, and ultimately produce police reports. For something like a police report, where it would be a three to four hour or a deal, putting all of this information together, making sure it's correct, this Draft One service is a great way to be able to take all of that data, produce a police report in just a fraction of the amount of time. The anecdotal evidence is there. Their customers

love it. It's saving them hours upon hours of time. And then furthermore, this is something that's being received very well in the actual court system. You go beyond just what their customers, the police officers or public safety officers, may feel. The prosecutors, the litigators in the courtroom are looking at this stuff saying, you know what, this actually works really well. I think one of the biggest questions in regard to AI today, given that we're in such an early stage of development in this technology is the reliability. And so, when you see prosecutors and litigators getting into the courtroom saying, you know what, these police reports are reliable, they work with this Draft1 product, I think that's super encouraging.

And then, the other part of Axon, really, it's all of these cameras and sensors that are connecting all of this stuff together and learning how to do more with the data. Those AI investments are really paying off there. And then finally, I think the acquisition of Fusys. They acquired this company, Fusys, back in the early part of 2024. Ultimately, this is just a deployable and automated real-time crime center platform. That's something that, again, is taking advantage of all of these connected devices, making sense of the data, and being able to provide real-time and actionable insights in a very quick fashion, to me, that just really speaks volumes to the investments that they're making in all of these artificial intelligence concepts.

There are a lot of high hopes baked into Axon's current stock price, and perhaps with good reason. But this is a company that's currently trading at 90X forward earnings, no matter how you slice it or no matter what metric you look at. You're paying a premium for this company at the moment. How do you figure out what a fair price is for Axon at the moment? That's a very fair statement that you made there. It does feel like you're always paying a little bit of a premium for a business like this, but that's for a good reason. I think part of that is because of the market opportunity that we continue to see here. A company that just crossed over $2 billion, and now they're seeing somewhere in their

neighborhood a market opportunity of $130 billion. That's not to say they're going to capture all that market. But even just capturing a fraction of that really speaks to the growth potential for a business like this. We go back to those things like the recurring revenue, these installed bases, the hardware that they get out there, and that they continue to iterate on. It's funny, you look at the Taser, for example, and it reminds me, again, I go back to Apple. You think about Apple, iPhone 1, 2, 3, 4, and on. Taser is following that same sort of path there. I think they're on Taser 10 now. But it's not just Taser, it's body cameras and all of this other stuff. To me, it makes a lot of sense that the business generates this

valuation. Now, I think one of the biggest risks with a company like Axon is valuation. We saw that it really started taking off here. Then over the last couple of weeks, we saw a really big pullback based on a headline there. That's understandable. I think with Axon, to me, it always struck me, and as a shareholder, this is the way I view it personally, I think it's a great company to focus on buying a little bit here and there when the opportunities present themselves. Building a position in a company like this over the course of time seems like the most prudent strategy to mitigate that valuation risk that I think is going to exist with this company for many years to come. Before we move on to the next topic, let's hit on that really big pullback that you just mentioned

and the headline that you hinted at. Despite dropping earnings yesterday, Axon was in the news last week for dropping, they dropped nearly 30% within three trading days. The reason behind this largely attributed to the fact that Axon cut ties with their former partner, Flock Safety. Flock Safety is an automated license plate reader, and Wall Street analysts started downgrading the stock as a result of the severing of this relationship, kind of the thinking being that Flock Safety might go on to be a competitor of Axon's. What was the nature of Flock's earlier relationship with Axon? How integral were they to the Axon value proposition? And how has that relationship changed? And how do you think that it will impact the company moving forward?

Yeah, I think this is a great example of sort of understanding the difference between the headlines versus reality. Now, this is something I asked Josh in our conversation. And it's also something that he addressed on the earnings call as well. This headline came out recently about the relationship with Flock Safety. Flock Safety being that tech startup in the automated license plate reader technology. They've been partners since April 2020. They've worked very well together, and it's something that has worked out very well for both parties involved. My question ultimately was, is this a sign that Axon is pivoting and going another way where they want to try to grow their own solutions here, or is it something where the companies

still want to work together, but they just need to ultimately negotiate better terms? It sounds like this is the latter. It sounds like this is something where the two companies still want to work together, But they really need to come to better terms that work out perhaps better for both parties. And that's negotiation 101, right? Everybody's going to have their own perspective on that. I would not be surprised at some point here in the near future if we saw a headline that said that Axon and Flock Safety are working together again and have renegotiated their relationship there. But time will tell there.

Regardless, if the worst-case scenario occurred, where the two just parted ways and would never work again, I think that's a net loss for Flock as opposed to Axon. I think Axon really has a lot of resources at their disposal to be able to build this kind of technology and do what they want to do. But my suspicion is, we will see this relationship continue. it does feel like it's a little bit of a negotiating tactic. We're going to move on to a little bit of a retail roundup to close us out for the day. We also got earnings this morning from TJX. That's the parent company behind TJ Maxx,

Marshalls, HomeGoods, and more. That company saw fourth quarter sales of $16.35 billion come in just below that of a year ago. Also saw fourth quarter profits stay flat with the year before. Management expects comparable sales for the year ahead to rise ever so slightly. All this might sound lukewarm, but Wall Street is relatively pleased with the news. The stock was up slightly, like about 3% this morning. We're not really expecting gangbusters growth in traditional retail companies, J-Mo, but if that's the case, what does success look like in this brick-and-mortar retail business? Yeah, I think these results were okay. It didn't light the world on fire, but given the retail environment today, it's more or less what

what we expected. I think with a company like TJX, this is a business that focuses very much on the value side of things for consumer. You look at the brands behind the company, it's TJ Maxx, Marshalls HomeGoods. For them, I think the success is clearly, No. 1, growing that top line. Revenue has grown a little bit better than 6% annualized over the last five years, which I think is encouraging, particularly given their value focus. But more importantly, I think you look at a business like this, net income is up better than 8% over that same course of time. They generated a bit better than $4 billion in free cash flow just over the last year.

So there's a lot to be said for focusing on that value consumer and having that broad array of different store concepts really, I think, plays into their advantage. And they really start to exploit that advantage of scale. Another element of this retail angle is that it's Party Cities last week in business. This is a company that was integral to at least my childhood. It's a party supply store. They went through their first bankruptcy restructuring in 2023. They were able to erase about a billion dollars of debt, but still found itself stuck with $800 million of debt. And therefore, this past December, it filed for bankruptcy again. A few franchisees,

just under 30 will kind of keep the independent party city locations operating. But for the large part, the business is closing down. This sticks out to me because CoreSight Research, which publishes data on retail closures, predicts the U.S. will see approximately 15,000 store closures in 2025. For context, in 2022, so peak pandemic, CoreSight Research tracked 10,000 store closures. So they're predicting even more store closures now than we saw during the height of the pandemic. What do you think is behind this? Is this an e-commerce story, or is there something else eating in-person retail? I don't think it's just an e-commerce story. I think that's a big part of it. We see a lot of retail these days, particularly the bricks and mortar, where they're very focused

on becoming more than just e-commerce. They want to become omnichannel. Being there for their consumers where and when they want or need. I think another part of this certainly is just given the nature of what something like a Party City sells, for example. This goes back to that old elementary school lesson of wants vs. needs. You talk about companies like Party City, for example, that's probably more of stuff that you want but don't necessarily need. You flip that on the other side there, you look at a company like TJX, where they're focusing a little bit more on things that consumers need, and they're absolutely focused on offering value where that could apply. When I think of Party City, the other company

it reminds me of is Oriental Trading Company. I don't even know if you know that. Oh, yeah. Those catalogs are also an integral part of my childhood. Yeah. Oriental Trading Company filed for bankruptcy in 2010, and then Berkshire Hathaway bought them in 2012. That's another example where the e-commerce angle is certainly playing into their favor. But with Party City, they were always so reliant on those big physical footprints. I just don't necessarily think that's the way that consumers think about these days. But again, going back to that omnichannel idea, I think that's where a lot of retailers are focused these days. It does seem not death by a thousand cuts, but definitely

a few cuts there. Omni-channel, e-commerce, changing consumer behavior, wants and needs, that all plays a part in it. Jason Moser, always a pleasure, always a party having you on the show. Thanks so much for being here. Thank you. Selling sugar and caffeine can be a great business. My colleague, Ricky Mulvey, caught up with Motley Fool senior analyst, Emily Flippen, to talk about the fast-growing coffee chain, Dutch Bros. Its stock is up about 160% over the past year. They break down the business model, the valuation, and the chocolate-covered strawberry mocha. Emily, in preparation for this,

Yesterday, I did go to a Dutch Bros and it was 9.15 AM on a Monday. I waited in line and then I made it about one third of the way through a chocolate covered strawberry mocha to fully appreciate the experience of what they sell. I made it through about a third of that drink before I had to stop. But this is an intensely popular coffee chain that I wanted to dive into because you cover the company. Have you been to a Dutch Bros? What was your experience like there. Yeah. I ironically actually haven't been to a Dutch Bros. They're expanding eastward. So I'm here in Maryland, but I grew up in Texas. And when I visited Texas semi-recently, I planned to visit one before I realized they didn't even offer brewed coffee, which is actually

the only thing I drink. So I do think calling this a coffee chain is being somewhat generous with your definition of a coffee chain, but I will just note, I mean, they do a really strong business outside of what you would imagine as your typical coffee-flavored beverages. They have protein shakes. They have smoothies. They have energy drinks, protein coffees. They do a good job of offering, I guess, a diverse range of products here. You're not lining up for the sweet cereal sips that could be a cinnamon swirl or one that has marshmallows on the top that promises to taste just like the bottom of a sugar cereal bowl? I guess only if I'm trying to replace my lunch with it.

Fair enough. This is what's interesting to the investors on the show. This is a company that is taking off in valuation and in sales. We'll compare this to Starbucks. Dutch Bros launching a lot of new stores as they try to push eastward. During that time, the same shop sales have grown by almost 10% in company-operated stores. This is at the same time where Starbucks global and North America sales have declined same-store sales at about 4%. What's happening with this disconnect? Why is Dutch Bros taking off while Starbucks is in decline during this Brian Nicol transformation? I think there's a couple of different factors at play. One element of it, I do think, is innovation. I think we have slightly a more

innovative product line here at Dutch Bros. They've been faster to change their menu, to add new products, to take away products that aren't working, to drive customers to come and transact at their locations. I think Starbucks has been arguably a little bit more stuck in their ways. They've had a harder time driving those transaction growths. I also think that Dutch Bros has been a little bit more approachable in a more cost-conscious environment. So I do think it's that push towards innovation as well as just a tighter consumer environment, which has driven that disconnect. But I will say, this is a hard environment for coffee chains. It's incredibly competitive. And it's not just Dutch Bros that's popping up around the corner. I mean,

We see a lot more local coffee shops as well as alternative beverage shops opening up. I think Starbucks here just has a brand image issue that is showing in their same-store sales here, whereas Dutch Bros is the antithesis to that, which is to say, it's cool, it's new, it's trendy, and it has a brand that is rising, whereas Starbucks is arguably declining. I went to Dutch Bros in the morning, and then I drove past Dutch Bros to go to Costco for a tire issue. Big story there. We'll do that another time.

It is past 7 p.m., and there is still a line at the drive-thru for Dutch Bros. Maybe getting some of that menu innovation you're talking about, such as the 911, which is six shots of espresso in an Irish cream brevet, or the Double Torture, which is an extra double-shot espresso, vanilla and chocolate milk. This is the innovation that people are lining up for. All of that is drive-thru. This is a 90% drive-thru business. If you're Dutch Bros, why are you getting rid of that coffee shop experience for people to enjoy

your 911 drinks or your double torture beverages? Yeah, I turned that question on its head. If you're Starbucks, why are you forcing me to walk inside of a store and stand in line just to get my coffee or just to get my beverage? I really do think the demand and the need for the third place, the thing that made Starbucks what it was 20 years ago, just isn't where the market is anymore. where I think there's this need for express, right? The drive-through model is kind of meeting consumers where they are today. And you'll see that through the line. And sure, that's not it for everybody. But I do think the consumer's willingness, as shown through that amazing, nearly 10% company-owned same-stop sales growth, shows that people are, at this point in life,

more willing to sit in a line from the comfort of their car or do that mobile order pickup, as opposed to physically go into a location. And in the case of something like Dutch Bros, that saves them on something like a real estate footprint because they don't need to pay for in-store seating or larger square footage. This is a stock that has exploded lately. The valuation is a tricky one. Earnings have 10X'd over the past year as the company becomes more profitable. However, Emily, when I look at this, this is still a coffee shop where 80% to 90% of your sales are going to go to your coffee beans, your rent. You have to pay the guy who called me a good man for ordering a medium chocolate-covered strawberry mocha rather

than a large chocolate-covered strawberry mocha. When he asked what I was up to for the rest of the day, I was like, I just got to work. He's like, oh, if you're working, you need a large, not a medium. No, I'm getting a medium. Anyway, that's where all the costs are going. When you're looking at this, you're probably not looking at an exploding margin expansion story, right? Or am I wrong? Yeah. Clearly, money well spent, if you ask me, or what a great employee there. But I do think you're wrong here. This is definitely a margin expansion story. Yes, to your point, there are still store expansions that's necessary here, right? I mean, part of the thesis here for Dutch Bros is they're growing store count

15% plus a year as they expand eastward. You can debate whether or not that's going to be successful, but that's management's guidance here. But also margins, I mean, this is a barely profitable company, right? They just got profitable over the last couple of years. margins are still very much in the world of expanding. So if you look at where their gap net income margins are today, it's right around 2% to 3%. If you compare that to any of the other players in this space, they are a fraction at where their competitors are. So I do think there is a lot of white space for this business to expand margins. And long-term, I think they have a better margin profile than the Starbucks of the world, than the Chipotles even of the world,

because they have a smaller footprint, lower overhead costs. They're able to do more with less simply because their model is more efficient. The reason why we're not seeing that come down to earnings yet is because they are still in expansion mode. They're still in growth mode. They're doing stuff like spending money on marketing costs, spending money on CapEx. All of those things are still coming down right now, which is why you're not seeing that flow through the bottom line. I think something like price to earnings is definitely the wrong way to be evaluating this company for where they are today. We'll talk about that in a sec, because 221 times earnings is an eye-popping multiple. But one thing I want to focus on

before we get there is the stock issuance. Dutch Bros does like to issue stock. They say they're not going to do it, but then you've got general corporate purposes going on, so maybe you've got to issue some stock. Is dilution a concern for long-term investors here? I would say yes and no. This has been a historically pretty dilutive business. Again, for where they are in the life cycle of this business. So this is still very much a growth company. We see this in a way that they're funding their capital expenditures. So you have a couple of different options for how you're going to raise money. This is a company that has chosen to do that via public markets. And part of that is coming from their private equity sponsors. So same company, same private

equity sponsors that say took Planet Fitness public. This is same thing that they're doing here at Dutch Bro. So some of this is selling out the private equity sponsors that's contributing a bit to that dilution. I'm not overly concerned about it, but I will say this about the dilution in general. This is a company that, as they seek to expand their store count, getting from that around 1,000 stores today to upwards of 4,000 stores over the course of the next decade, so massive expansion plans, that is incredibly, incredibly capital-intensive. They want to do that mainly through company-owned stores. They have some franchise-owned stores, but they want to do that mainly through their own company-owned stores. That requires a lot of upfront capital.

Now, management has said that they have raised the capital they need and will be self-funding from this point forward. So, they believe that they're not going to be dilutive from this point forward. I'm a little bit more doubtful. I built my model for this company at the midpoint end of last year. In order to meet a lot of these growth targets, I expect that they're probably going to need to raise capital. I would expect that they probably do that via debt at some point, as opposed to issuing more shares. I'm not management though, so what do I know? So I'm a little bit doubtful of that. But if you're taking management at their word here, they expect that dilution will slow down. But to your point, I mean, this is a company that is still growing, still just becoming

profitable. But if they're able to do that and be self-funding, then that dilution should slow down or stop altogether. So you don't want to use price-to-earnings companies at over 200 times earnings. All right. What multiples do you want to use here to talk about this company's valuation? I mean, it's not that price to earnings is the wrong way to think about it, right? When you think about a business long-term, you're always evaluating, okay, where do I think it's going to be five, even 10 years from now in terms of cash generation? Earnings is one way to evaluate element of cash for that company, right? Operating margins. I just don't think where they are today in terms of their current earnings potential is representative of their long-term earning

potential. I do not think this company is going to be producing 2% net income margins into perpetuity. I think that's probably going to be closer to 15% net income margins into perpetuity. So really what I'm looking for here is how rapidly can they expand and how can they sustain that store count? So as they expand eastwards, how do they handle competition? They have some pretty stiff competition eastward. Not only does real estate get more expensive, but they're competing with a bunch of preexisting coffee chains. Northeasterners are very particular with their coffee. So let's see how they do there. If they're able to achieve double-digit store expansion, this 4,000 store count, that's kind of what I'm looking for here. How are they

able to do in terms of same-store sales growth? We mentioned at the top that they have nearly 10% same-store sales growth for company-owned stores. However, management has consistently guided for low- to mid-single-digit same-store sales growth. That, to me, says, okay, maybe there's an element of fattiness here. Are they cannibalizing their existing stores? Right now, their expansion plans are kind of through this fortressing strategy, long-term, two years from now, three years from now, did they overbuild their stores? Do they have to start closing down stores that are underperforming? In that case, that's showing to me that this is a fattiness, right? They're not actually able to compete in the areas that they're rapidly expanding into. So, those are sort of the

things that I'm using to judge long-term performance, not saying, okay, well, where are earnings right now, right? That's not the valuation story for this company long-term. The actual story is, what does a long-term margin profile look like? What does a long-term growth story look like? There are a lot more factors that go into that beyond just the 2% earnings margin that we see today. I did a valuation that you did a really nice one that was very thoughtful and detailed. Mine, for those listening, was the equivalent of playing tic-tac-toe on the back of a napkin. Let's say Dutch Bros. quadruples revenue, quadruples store count quadruples revenue and gets a more mature Starbucks-type earnings multiple. Right now,

this stock would be considered cheap. But let's say, Dutch Bros, it doesn't quite go as they expect. They double their revenue, they keep issuing some stock, and you still have a 50X earnings multiple, which is a little growthy, especially compared to Starbucks. If that happens, investors are even. As you're watching this company's growth story moving forward, what are the scenarios you're thinking about? Is it these? Is it something else? Yeah, something else entirely. Because when somebody is slapping an earnings multiple onto a company, what you're implicitly doing is taking in the market's assumption for something like operating margin. What is your operating margin assumption in that case?

I did about 10%. We matured out at about 10%. So that's the sort of assumption that I think is critical when judging this type of company's success. And there's two different ways that this company goes about building out their store location. There's a ground leasing model, right? And that ends up being slightly more capital intensive in the long term versus in the near term. And there's lots of different ways that you can go about building out 3,000 plus locations that can end up having an impact on what the long term margin profile for this company looks like. And so I always hesitate against making kind of broad reaching assumptions about something like an earnings multiple because the implicit

assumptions that go into that can kind of end up making errant assumptions about the valuation of a company. So in my case, what I'm looking for, and again, this is a lot easier to make the math work for a business like Dutch Bros when I did this math again earlier last year versus today, so I'm not trying to argue that the company is a screaming buy today. I can still make the math work. It's a lot harder. I will argue that. You need that 15% plus store count over the course of the next decade. That's a lot. That's a lot. That's one of the biggest factors here. You need same-store sales growth around 5% to 6%. A lot of that is coming from pure transaction growth. So, the royalty members, the rollout of stuff like mobile ordering, you need a lot of people

coming back ordering more at higher prices. So, same sort of sales growth above what management is guiding for today, as well as a net income margin gap, non-adjusted net income margins, 15% to 20%. So, I think if you can make those assumptions work, then you're looking at a market-beating investment here. And that's with my discount rate of around 8% to 9%. Hopefully, that's not too in the weeds. I really enjoyed the discussion. Emily Flippen, thanks for being here. Appreciate your time and your insight. Yeah, thanks for having me. Everyone go grab a coffee. As always, people on the program may have interest in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend two friends like you. I'm Mary Long. Thanks for listening. We'll see you tomorrow.