When searching for buying opportunities, investors might immediately look at stocks that have crushed the market and are putting up exceptional recent returns. One particular business has done just that. So far in 2024, this monster restaurant stock has skyrocketed 236%, substantially outperforming the broader S&P 500 by an incredibly wide margin.
Does this strong momentum mean the company should be in your portfolio right now? Here's what investors need to know.
Healthy eating
I'm not talking about Chipotle Mexican Grill, which has done a great job rewarding shareholders in recent years. There's another fast-casual chain that's winning over investors in remarkable fashion: Sweetgreen (SG 0.91%).
Through its network of 236 stores in the U.S., Sweetgreen focuses on offering healthy salads and grain bowls. Menu items, some of which are seasonal, are fully customizable. And the business emphasizes working with local farmers to source real ingredients, while at the same time operating in an environmentally friendly way.
Sweetgreen has found success by replicating the fast-casual model, giving customers a more expensive option than traditional fast food, with items often costing more than $15 each. At the same time, the quality of the food is certainly better, which is what people pay for.
The business leans heavily on digital capabilities, an essential strategic priority to compete effectively in the cutthroat restaurant sector today. In the third quarter, 55% of total revenue came from digital channels, adding convenience for hungry consumers.
A favorable market environment in 2024 has helped, but I believe investors have also become more optimistic given Sweetgreen's recent financial results. The company's growth is hard to ignore. In the last three fiscal quarters, revenue jumped 19.7% versus the same period last year. This was driven more recently by a combination of five net new store openings and 6% same-store sales growth in the third quarter.
Tread with caution
It's not surprising that Sweetgreen draws comparisons to Chipotle. The Tex-Mex chain currently has 3,615 stores, with plans to roughly double that footprint to 7,000 locations in North America over the long term. As of this writing, the business carries an $88 billion market capitalization, which is about 20 times higher than Sweetgreen's.
So, investors seeking huge growth potential might have their eyes on Sweetgreen. The hope is to ride this year's momentum to strong returns in 2025 and beyond. However, it's important to understand the bear argument, which I believe is compelling.
For starters, Sweetgreen isn't yet profitable. It reported a net loss of $21 million in the third quarter. It's hard to tell when, if ever, this will change for the better. Sweetgreen needs to continue expanding its store base and control expenses, which won't be easy given how competitive the industry is.
Chipotle has been thriving because it has been able to constantly grow the annual sales volume that each store generates, a clear indication of more foot traffic and higher ticket sizes over time. Sweetgreen has stalled in this department, which is a troubling sign. In the latest quarter, the average store generated $2.9 million in annual revenue, the same as in Q3 2023.
The valuation is another reason why I think investors should pass on buying Sweetgreen stock. It trades at a price-to-sales (P/S) ratio of 6.4. In the past 12 months, the P/S multiple has actually climbed 200%, representing the vast majority of the share price gain. It's obvious that the market has become overly enthusiastic about this company, which leaves no margin of safety for prospective investors.
If you're interested in owning this stock, I believe the best thing to do is to monitor the company to make sure same-store sales continue rising as new locations are opened. Additionally, Sweetgreen must register positive net income on a consistent basis. Once these conditions are met, be patient until the valuation gets to a more reasonable level.
