Cava Group (CAVA -3.55%) was one of the hottest restaurant stocks to own last year. In 2024, the stock soared by an incredible 162% as investors were thrilled with the company's impressive results. While many restaurants struggled to generate growth, Cava demonstrated resilience and strong demand, leading to some incredible gains for its shareholders.
But in the last month of 2024, cracks started to appear. And entering this week, the stock has declined by around 20% since December. Is this a great opportunity for investors to buy the dip and load up on this top restaurant stock, or could this be the beginning of a much larger sell-off for Cava?
Cava's growth rate has been accelerating
The big reason investors have long been bullish on Cava is due to its strong growth prospects. The Mediterranean fast-casual restaurant chain has been performing exceptionally well, and the business still has many more markets it can expand into in the future.
In its most recent quarter, which ended on Oct. 6, the company's sales totaled $241.5 million and were up 39% year over year. That's impressive given that economic conditions haven't been ideal of late, with consumers cutting back on discretionary spending. But in Cava's case, the growth rate has not only been strong, but it has also been accelerating.
CAVA Operating Revenue (Quarterly YoY Growth) data by YCharts
The company has been opening more locations, and that has helped boost its growth rate. But even comparable-restaurant sales growth was 18.1% last quarter, which is a great sign that organically, the business is also growing at a fast rate. Comparable sales factor in only the restaurants that were open a year ago. Many restaurant chains are happy with single-digit comparable sales growth -- Cava is on a whole other level.
Cava ended the quarter with 352 restaurants, with 11 net new locations opened during the period. Given its modest size, there's still plenty of room for Cava to get a lot bigger in the future, and for its growth rate to get even higher. And that's a big reason growth investors are willing to pay a significant premium for the business. The key question, however, is whether that premium has become too high.
The stock is trading at 280 times earnings
Cava is a tremendous growth stock, but given its significant run-up in value last year, too much of its future growth may already be priced into its current valuation. Its price-to-earnings multiple is around 280 today, which is egregious, even despite its promising growth prospects.
The danger is that at such a high premium, it may take a long time for its earnings to catch up and for Cava to become a more reasonably priced stock. If you're planning to hold on to it for 10-plus years, there's a possibility you can still earn a great return, but if you're looking at a much shorter time frame, it may be difficult to justify this high of a valuation for the stock.
Part of the reason for the stock's recent sell-off may be due to investors cashing out their profits, recognizing that Cava may be running out of room to rise a lot higher. As promising as the company's growth prospects may be, that doesn't necessarily mean that any price is a good price to pay for the stock. Buying at a high valuation could drastically limit the returns you get from owning the stock.
Is Cava a good stock to put in your portfolio today?
Cava's stock was heavily overpriced toward the end of last year, and a correction was certainly justifiable. But even with the recent decline, the restaurant stock remains incredibly expensive, which is why I would hold off on buying it right now, as I can definitely see it going lower in the months ahead.
There are better options out there for growth investors to consider. Cava's growth is impressive, but unless you're planning to hold for the very long haul, you may be better off just putting the stock on your watch list for now.
