Cava Group (CAVA -1.76%) was one of the better-performing names in 2024. Even after a recent pullback, the stock has risen by more than 175% over the last year, likely because many saw it as a second-chance Chipotle as it works to bring fast, healthy Mediterranean food to more customers.
However, the stock has dropped almost 25% since early December. Hence, the question for investors: Is Cava in a temporary bear market and will continue surging in 2025, or will it face considerable pain as the value of the restaurant stock continues to slide?
The state of Cava Group stock
Admittedly, the narrative that Cava is "Mediterranean Chipotle" is oversimplified but difficult to ignore. Indeed, consumers and investors will probably recall that Chipotle built its success by offering healthy, reasonably priced food that is fast and delicious.
Moreover, American consumers have grown more health-conscious in recent years, and various segments of the media have long promoted Mediterranean cuisine as a healthy alternative. Hence, the times seem to call for a fast-casual restaurant like Cava.
Additionally, Cava's growth has outpaced Chipotle's. In the first 40 weeks of fiscal 2024 (ended Oct. 6), revenue of $736 million grew 34% compared with the same period in fiscal 2023. In comparison, Chipotle's revenue rose 15% over approximately the same period.
Also, Cava's restaurant count, which had reached 352 at the end of fiscal Q3, rose 21% year over year, and its same-restaurant sales grew 11% during that period.
Furthermore, its costs and expenses rose 28% during the first 40 weeks of fiscal 2024, slightly lagging the revenue increase over the same period. That led to a $52 million net income, well above the $12 million during the same time frame in fiscal 2023.
Cava looks set to improve its performance, as it has guided for 12% to 13% same-restaurant sales growth for fiscal 2024. Since analysts predict 32% revenue growth for Cava for the fiscal year, it appears set for continued prosperity, at least for now.
Cava's growing pains
Nonetheless, the recent decline in the stock may face a challenge that tends to hurt growth stocks: slowing revenue increases. In fiscal 2025, analysts predict 24% yearly revenue growth. While that still represents robust growth, it also marks a significant slowdown from the last fiscal year.
Moreover, it compares less favorably in other ways to its larger fast-casual rival, Chipotle. Unfortunately for Cava investors, this goes well beyond the fact that Mexican cuisine is more popular than Mediterranean food.
Cava's goal of 1,000 restaurants by 2032 would approximately triple its number of locations. However, Chipotle intends to operate 7,000 restaurants in North America, not including its international plans (it operates over 3,600 locations now). Since Cava has not outlined any publicly outlined goals to expand outside the U.S., Chipotle may have a larger growth goal, even in percentage terms.
Amid that future, valuation differences favor Chipotle. Cava's recent turn to profitability probably makes its P/E ratio a misleading valuation comparison. Still, Cava's price-to-sales (P/S) ratio of 15 is far above Chipotle's sales multiple of 8, which may leave investors wondering whether Cava is worth that extra expense.
CAVA PS Ratio data by YCharts
Where will Cava stock go in 2025?
Given current conditions, investors should expect Cava stock to struggle over the next year. Indeed, with its rapid growth and potential to add new locations, Cava Group stock should prosper longer term, meaning current shareholders should probably not sell.
However, slowing revenue growth tends to hurt stocks with high valuations, a factor that may have already begun to weigh on Chipotle's stock performance. Additionally, comparing Cava's valuation to Chipotle's highlights how expensive the stock has become, making investors less inclined to buy Cava shares.
Ultimately, Cava Group stock should turn into a winning investment for long-term shareholders. Nonetheless, its long-term investment case appears more favorable than its potential performance in 2025.
