When Cava (CAVA 1.57%) went public in June 2023, it was hailed by some as the new Chipotle Mexican Grill (CMG -0.12%). It operates a similar model of fast-casual restaurants offering healthy, fresh food, with its Mediterranean-style fare providing a different spin on the concept.
Cava is meeting investor expectations, and just over a year into being a public company, it's heading in the right direction. Should Chipotle investors take a look? Here are three things to think about before opening a position in either stock.
1. Cava is growing much faster -- for now
As a young company, Cava's growing at a rapid pace. It's taking a page from the Chipotle playbook, but since Chipotle is much more mature, the Mexican food chain's growth isn't quite as high.
| Company | Q2 2024 Sales Growth (YoY) | Q2 2024 Comps Growth (YoY) | Q2 2024 EPS | Q2 2024 EPS Growth (YoY) | Restaurant-Level Profit Margin |
|---|---|---|---|---|---|
| Cava | 35.2% | 14.4% | $0.17 | (22%) | 26.5% |
| Chipotle | 18.2% | 11.1% | $0.33 | 32% | 28.9% |
Data sources: Cava and Chipotle quarterly filings. EPS = earnings per share. YoY = year over year.
Cava's total sales growth rate was almost double Chipotle's, but its comparable sales growth was only a tad higher. Chipotle reliably delivers steady double-digit percentage growth, even if that's at a lower rate than a new competitor, and its comparable sales growth is outstanding. So is its profitability.
2. Cava's opportunity may be more limited
You might think Cava has a longer runway because it's pretty young and has only 341 stores. However, its management team sees the opportunity to expand the chain to a total of about 1,000 stores over the eight or so next years. Chipotle, by contrast, has its model down pat and a proven track record of popularity, and it plans to double its store count in North America to 7,000. Cava's opportunity percentage-wise may be higher, but its overall opportunity still appears smaller in comparison.
In the second quarter, Cava opened 18 stores and plans to open at least 54 for the full year. Chipotle opened 52 stores just in the quarter and plans for about 300 for the year.
Chipotle is also expanding internationally. Cava may follow that strategy at some point if all goes well, but it's not even on its radar yet.
2. Cava's stock may not be worth the price
The problem with hot stocks is that they often get hot before the average investor even hears about them. Initial public offering (IPO) stocks often start out these days at ridiculous valuations, making them non-starters for a disciplined retail investor. Even when they do continue to rise after that initial surge, it's usually a prelude to an eventual fall; these stocks simply can't support their unreasonable valuations for too long. In that context, consider Cava, which is up more than 200% since its IPO just over a year ago.
That's clearly a Cava issue, but Chipotle stock isn't cheap either, and it has delivered phenomenal gains for investors who have held on. Chipotle stock is down since June, and has wobbled a bit since the news broke a couple of weeks ago that superstar Chief Executive Officer Brian Niccol is leaving it to lead Starbucks.
CAVA PE Ratio (Forward 1y) data by YCharts.
At the current price, Cava stock just does not look compelling. For all of its great performance and potential, I don't think it can sustain this kind of valuation for long. Is there a chance that it will keep up this streak and hold onto this valuation? There is -- but the share price has absolutely no wiggle room for any mistakes. Cava stock surged higher after the excellent second-quarter results, and it will plunge if there's any hint of weakness in the business. That's how it usually works with hyped-up stocks.
Risk-tolerant investors might be more interested in Cava stock, but most investors should see this as an opportunity to buy Chitpotle's reliable market-beating stock on the dip.
