With the advent of the internet and social media, it's hard to keep secrets. There are all kinds of investing communities, and when word gets out about an amazing stock, investors can catch on pretty quickly.
This seems to be the case with Cava (CAVA -1.82%) stock. Cava went public a year-and-a-half ago, and its stock is up 187% in 2024. The market is mad about this young fast-casual chain, which is growing fast and becoming profitable. If you haven't bought in yet, can you expect similar results next year?
Why Cava is so hot
Cava stock has been on fire because it's demonstrating phenomenal performance, and it has massive opportunities. Together, that's a powerful combination, and it's not surprising that investors are flocking to Cava stock.
Despite the inflationary environment, Cava has reported strong sales growth, and profits have improved. Now that inflation appears to be moderating, that could be even easier. Here's a breakdown of sales and comparable sales (comps) growth as well as net income progress and new stores since Cava went public.
| Metric | Q2 23 | Q3 23 | Q4 23 | Q1 24 | Q2 24 | Q3 24 |
|---|---|---|---|---|---|---|
| Sales growth | 64% | 50% | 53% | 30% | 35% | 39% |
| Comps growth | 18% | 14% | 11% | 2% | 14% | 18% |
| Net income (in millions) | $6.5 | $7 | $2 | $14 | $20 | $18 |
| New stores | 16 | 11 | 19 | 14 | 18 | 11 |
Data source: Cava quarterly results.
Originally, management had thought high comps growth was a benefit of hype around its initial public offering (IPO). But comps continue to increase at robust rates, which implies there's a viable concept here that customers like. If that's the case, Cava could expand across the country, generating higher sales, and the stock should reflect that over time.
Cava's menu features healthy and fresh Mediterranean fare, and it has 352 stores as of the end of the third quarter. It's planning to open about 57 for full-year 2024, expanding at a steady rate. Although investors love to see a fast-expanding chain, it's more important for a restaurant chain to open stores at a manageable rate instead of burning through cash. It also leaves a long growth runway as it continues to open stores across the country.
As it happens, Cava is turning cash-flow positive. It generated $24 million in free cash flow in the third quarter, up from a negative number last year. Management says that it's building new stores deliberately; with demand higher than expected, it's resulting in positive free cash flow.
This isn't a no-brainer
Cava is a well-run company with plenty of opportunity, and on the surface, it looks like a winner. However, there are several risks that investors shouldn't ignore.
One is its youth. Cava is still so young and small that despite its excellent performance until this point, it doesn't have a long enough track record to be called reliable. It's a long and complicated journey to get from 300 restaurants to 3,000. For the risk-tolerant investors, that could be overlooked, but it has to at least be acknowledged. Consider how many restaurant chains never make it; even well-established ones peter out.
Another risk here is valuation. Cava stock is astronomically expensive, so you're getting no bargain here. The stock is skyrocketing, and that doesn't leave a lot more room for growth. It trades at a forward one-year P/E ratio of 192, and a price-to-sales ratio of 16.
Part of what's happening with Cava stock is that it's a rare exciting IPO stock when there's been a dearth. The previous, inflated bull market ended with the most IPOs in a year, and IPOs have dropped dramatically since then.
It's easy to see what investors can see in Cava's future, especially when they compare it to Chipotle Mexican Grill, the original fast-casual giant. Chiptole has created incredible shareholder value over the past few years, and investors can see Cava as being the next big fast-casual winner.
Even though Cava could keep growing, so much growth is already built into its current price. I don't expect Cava to repeat this performance in 2025, and I'd wait for a better entry point before buying Cava stock.
