Shares of Cava Group (CAVA 0.46%) are skyrocketing this year. The Mediterranean restaurant chain's stock price has surged 160% higher in six months, more than tripling from a temporary dip in the fall of 2023.
So Cava certainly has market momentum on its side, but it's not a cheap stock today. Shares are changing hands at lofty multiples such as 13 times sales and 345 times earnings. Will the company grow into these generous ratios, or is the stock overdue for a price correction?
Let's take a look.
Analyzing Cava's rapid market expansion
Growth stocks can soar to ridiculous heights in their early days. When the business is all about expansion and building a long-term force of loyal customers, profits are often weak or even negative. At this point, valuation is all about high-octane business growth and the promise of generous profits at some point in the distant future.
Cava certainly fits this profile. The company has been around since 2010 but joined the public stock market less than a year ago. Its year-over-year sales growth consistently lands in the 26% to 28% range, with the exception of a 36% jump in the holiday quarter. Cava managed 323 restaurants at the end of first-quarter 2024, up from 263 in the year-ago period and 195 in the summer of 2022. And the company stands out among high-growth businesses by swinging into positive bottom-line territory as soon as it entered the public market.
Direct ownership vs. franchising
So Cava is indeed a proper growth stock. In fact, it's an unusually profitable growth story already. The company also stands apart from its peers by running a chain of company-owned restaurants. Most food service brands these days prefer to partner up with franchisees instead, keeping only a handful of locations under their own wing. Franchised chains tend to grow faster, but Cava prefers tighter control over the customer experience and a more direct financial involvement.
This strategy is not unique to Cava. Chipotle Mexican Grill (CMG -2.45%) follows a similar approach, operating almost all of its locations for the same fundamental reasons. Another example, although not publicly traded, is In-N-Out Burger, known for maintaining high standards through direct ownership and strict quality requirements. This chain famously won't expand beyond the freezerless range of its own meat processing facilities in California.
By owning their restaurants, these companies can directly oversee operations and customer satisfaction, potentially leading to better long-term growth and brand loyalty. Cava picked an elite group of role models, so I'm not surprised to see the company enjoying profitable high-octane growth.
Is Cava a good buy today?
If you're looking for a deep-discount value stock, you should drop Cava and move on. That recipe just isn't on the menu here.
But if you're hungry for the second coming of consistent market-beater Chipotle, or a publicly traded version of In-N-Out Burger, Cava might be your best bet. It's not your only choice, though -- market darlings like the Dutch Bros (BROS 1.80%) coffee shops and Kura Sushi (KRUS -2.80%) revolving sushi bars also prefer direct ownership over franchising, with strong real-world results.
If companies like Cava, Kura, and Dutch Bros continue their profitable growth stories for a few more years, they could inspire a strategy shift across the restaurant sector. So far, they are inspiring experiments in how to run a successful growth story without losing sight of product quality and bottom-line profits. Cava's stock isn't cheap, and early investors may have boosted this chart a bit too quickly -- but it definitely belongs on your watch list for further research.
And if the price ever drops into a more comfortable range, you should be ready to take action. It's the kind of high-priced growth stock you should consider buying on the dips.
