I started a reply earlier in the day and the computer crashed. Glad it did, since your addition does help give the bigger picture of what your daughter thinks, something that was missing in the original post.
There is a third option in addition to the two you list in your update: She stays with this competitive team (not just doing recreational dance at her current studio but staying with the current dance team)--with the realistic expectation that she will get excellent technical training but won't WIN much. That is an option if she decides that being with this particular team of friends and at this particular studio outweighs her frustrations.
I think the other two options you list are truly the better ones, but this third option is one to put on the table. It sounds as if she might be frustrated enough to say, yes, I want to go elsewhere and be more challenged in choreography, but it's her call about whether she wants to stay put or go. Ask her (without commentary of your own, because what you say will influence her, and she might feel she must do whatever makes you happy) : "If you stay with the current team and studio, with the realistic knowledge that you won't win much, but the knowledge that you would still get good technical training--would you want to stay?" And let that percolate with her, rather than telling her one way or the other what you think. Yep, tell her what you think later, but she needs to think through all three options.
I'd have her sit down with pen and paper and list the pros and cons of each option and list any additional pros and cons she can think of. It's a good exercise to see these things in writing.
I like the post below that urges the dancers to go as a team to the teacher and ask that their routines be tougher. If the dancers do this in a mature and positive way that focuses on challenging new routines, and not in a "we're not winning enough" attitude, it could be inspiring for the teacher and kick up her work a notch. But a lot depends on the teacher's personality and how she (assuming it's a she -- my daughter just came in from a class taught by a male teacher!) regards her own teaching. If the teacher is pretty open to suggestions as a rule, she might take it well. If she is touchy or defensive, she might see it as a rebellion. But if the kids approach her maturely, then it could work. But it's for these teens to do it, not their parents. If the teacher sees a mature suggestion as rebellion, and takes it out on the dancers in negative ways, then you and she will both KNOW that the teacher is one she's outgrown and one who is not open to change.
If she thinks she wants to leave but isn't sure, I would have her do some sample classes at other studios if that's done in the competitive dance world. (Not sure if maybe they don't do that out of fear that other studios will steal their routines--??) My daughter dances ballet and modern, noncompetitively but extensively, and that's what one does if considering changing studios; you go in and take a sample class or observe a class. If that's not possible, she could talk to other dancers who have left the studio. But that requires a little care and some maturity -- dancers might have chips on their shoulders (I've seen it happen first-hand) about the current studio, and your daughter should take what they say with a grain of salt.
One last thing. You mention that you're proud of her "no matter what" but then also say "there should be some return on investment." I hope that by "return on investment" you mean, she's happy -- even if that happiness comes on a team that doesn't win much. If she chooses to stay put at least for now, can you be OK with that choice on her part? I don't see her really staying put, based on what you say about her thoughts so far, but you need to be ready for her to make a choice that may not be what you want at the moment.