Cava Group (CAVA -1.65%) stock has electrified investors as one of the most exciting initial public offerings (IPOs) in a recent dry spell. Its healthy, Mediterranean menu is attracting customers while its stock attracts investing dollars.
Cava stock is already up 96% this year. Is there still time to buy into this growth story?
Why Cava stock is surging
Cava could be the next Chipotle Mexican Grill, and considering Chipotle's massive stock run, investors want to get into Cava stock early. Cava operates a similar model to Chipotle, offering healthy, fast-casual fare that uses a limited number of ingredients, like harissa, tzatziki, and lamb meatballs, and is easily replicable across stores. So far, it's a hit in the regions it's already entered, which is throughout the southern part of the country. It only has 323 restaurants as of the end of the first quarter, but it believes it can succeed throughout the U.S. As it continues to expand, it looks like a no-brainer for growing revenue and scaling.
Most of its growth is coming from new stores. Total revenue increased 30% year over year in the 2024 first quarter, and same-store sales were up 2.3%, a sharp deceleration. Management had previously said that its strong same-store sales growth was aided by the hype surrounding its IPO, and while that lasted for a while, it's over.
Image source: Cava Group.
However, it's still reporting positive same-store sales during a pretty rough time, which is impressive, even though it's slowing down. The likelihood is that same-store sales will accelerate under improved operating conditions.
Cava is scaling efficiently and has been reporting increasing profits. Net income was $14 million in the first quarter after a $2 million loss last year, and it reported a full-year profit of $13 million in 2023.
It's exceeding its own expectations, and management raised guidance across measures after the first-quarter report. It's expecting 5.5% same-store sales growth, raised from 4%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of around $103 million, raised from $89 million. Cava stock jumped after the report.
It may also have benefited from Chipotle's recent stock split. Since investors see Cava as the next Chipotle, hype around Chipotle probably trickled down to Cava stock, too.
Is there any more upside for Cava stock?
It sounds great, right? For the most part, yes. But there could be a few holes in the investing thesis.
One is valuation. Cava stock has an astronomical valuation, and it's going to take it some time to grow into that, even if everything goes right in the business.
CAVA PS Ratio data by YCharts
This is unusual for the current market. Investors who only had experience in a soaring bull market got a rude awakening when high inflation hit and the market tumbled, and they're generally being more careful right now. Valuation isn't the only thing that matters in a stock, but it should always be a consideration. And a stock that can't carry a premium valuation will eventually drop.
The other important concern is that Cava is so young. Yes, buying now may give investors the best chance to maximize gains, but there isn't a long enough track record for investors to be fully confident that Cava can pull off a large expansion plan profitably. And with its hefty valuation, it can't afford any missteps.
I'd be very wary about Cava right now. It may continue to climb, but there isn't a great underlying basis to support that, and it seems to be supported by a lot of hype (and hope). You don't know when the tide is going to turn, so I'd stay away for now and keep Cava on my watch list for a better entry point.
