Dutch Bros (NYSE:BROS) is a coffee chain that went public in mid-September 2021. It became a big hit, climbing more than 100% from its original IPO target price of $23.

That’s an impressive financial return for the investors who believed in this operator and franchisor of drive-thru shops. Still, I think it’s too early to open the champagne.

Today and beyond, prudence is required with BROS stock. Here’s a deeper look into why that’s the case.

BROS Stock: IPOs Are a Battle Between Logic and Emotions

I place IPOs in the same category as special-purpose acquisition companies (SPACs). I do not like them because both involve unknown financial performance at the time they go public.

When a company is private, it can pretty much do whatever it wants with its cash and business model. But when it goes public everything changes. Requirements exist. Comparisons to other companies’ financial performance start to appear.

That’s already the case with BROS stock, which some compare with Starbucks (NASDAQ:SBUX). I do not fully agree with that idea right now. It is too early to make this comparison, and there is a huge difference in the market capitalization of these companies. You just cannot compare apples with oranges.

I believe that investors have been irrationally positive about the BROS so far. Here’s why.

A Brief Synopsis of Key Highlights

In its S-1 Prospectus, Dutch Bros has reported some positive data, including two key points:

• 14 years of positive same-shop sales
• Revenues grew from $186 million in 2018, to $327.4 million in 2020, representing a compound annual growth rate (CAGR) of 33%

Dutch Bros is a profitable company. It has positive income from operations and positive free cash flows. But in 2020, total revenue of $327.41 million resulted in net income of $5.73 million. That’s a significant decline given its net income of $28.39 million in 2019. In fact, that’s almost an 80% decline in profitability. As such, I consider this 1.75% net margin for 2020 too fragile.

Business Plans: Go Big With Discipline

In an article on Yahoo! Finance a few days after its trading debut, President and CEO of Dutch Bros Joth Ricci stated the IPO was the “culmination of 30 years of hard work by thousands and thousands of employees and people across the western half of the U.S. that have really built Dutch Bros.”

“We’ve been a very disciplined growth company from the beginning,” he added. Also in the article, it was mentioned about Dutch Bros that “As of June 30th, 2021, it has 471 locations across 11 states.” Furthermore, “the company plans to accelerate … with long-term potential of at least 4,000 Dutch Bros locations in the United States.” Dutch Bros thinks that its Blue Rebel energy drink may also become a big hit, bringing additional revenue and profits.

I’m concerned about the capital expenditures the company would require to expand from 471 locations to almost 10x that amount within a few years. Large capital expenditures will inevitably put downside pressure on free cash flow and profitability as operating costs will rise.

Key Risks With Dutch Bros Now

In the S-1 Prospectus Dutch Bros refers to several business risk factors. Some notable ones include:

• Its “marketing programs may not be successful, and … [its] new menu items and advertising campaigns may not generate increased sales or profits.”
• It “may not be able to compete successfully with other coffee shops, QSRs and convenience shops, including the growing number of coffee delivery options.”
• Its “shops are geographically concentrated in the Western United States, and … [it questions if it] could be negatively affected by conditions specific to that region.”

There are plenty more potential risks the company identifies in its S-1. You just have to keep digging. But ultimately, if I had to pick two main risk factors, I would focus on the intense competition and the geographical concentration of shops that exists today.

The net profitability of Dutch Bros is now marginal. Marketing costs and a pricing strategy to cut down prices to attract more customers may bring more revenue, but it will be negative for the profitability. No one says running and expanding a business is an easy task.

The Bottom Line on BROS Stock

I would like to wait and see in the next quarters what Dutch Bros can achieve with its financial performance.

Now that BROS stock has run too high, too fast, it’s vulnerable to a correction. Prudence now suggests investors wait-and-see. With more data, we can evaluate future trends in revenue and profits.

Be patient. I admire the disciplined approach of its management, so why not wait for it to deliver measurable results?

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.