Cava (CAVA 2.84%) is one of the hottest restaurant growth stocks to come along in a while. It rocketed to above $170 in 2024 before pulling back late in the year, but Argus Research analyst Christine Dooley sees the dip as a buying opportunity.
Dooley recently reiterated her buy rating on the shares, as well as the $158 price target she gave them in November. That figure is 37% higher than the current $115 share price.
Should you buy the stock?
Cava is growing at impressive rates. Revenue grew 39% year-over-year in the third quarter. The company is driving growth by opening more locations, but what's most impressive is the growth at existing restaurants. Same-restaurant sales were up 18% over the year-ago quarter.
"Our third-quarter results demonstrate the strength of our Mediterranean category-defining brand and the broad appeal of our unique value proposition, creating what is quickly becoming the next major cultural cuisine category," CEO Brett Schulman said in the Q3 earnings release.
It's also demonstrating it can expand in a profitable manner, with net income improving from $6.8 million in Q3 2023 to $18 million in Q3 2024. Cava's restaurant-level profit margin is 25%, which is on par with Chipotle's.
Chipotle has delivered monster returns for investors over the last 15 years, but its valuation was never this expensive. Cava currently trades at a frothy price-to-sales multiple of 14.8, which might be fair for a fast-growing software company, but not for a restaurant chain. Most analysts rate the stock a "hold."
Wall Street analysts sometimes can point investors toward good ideas for stocks that would be worth buying on the dip, but in this case, I wouldn't follow Argus' recommendation. Cava might rebound in the near term, but its upside potential may be limited over the next few years until the company grows into the high expectations already priced into its shares.
