If a company is able to achieve impressive growth at a time like now, when people are struggling amid inflation, it can be a sign of a truly impressive business. That's a key reason why Cava Group (NYSE: CAVA) is often seen as the next Chipotle, as the fast-growing business could have a lot of upside given its relatively modest $13 billion valuation.
Cava Group's sales are growing by double digits, and it's opening more restaurants. At the same time, it's also experiencing strong profit growth. All in all, the business is doing incredibly well even under less-than-ideal economic conditions. But with its stock already amassing some significant gains this year, has its valuation become too rich for it to still be a good investment right now?
Cava is coming off another great quarter
What often appeals to growth investors about Cava as an investment is the company's ability to continually generate strong results. The Mediterranean fast-casual restaurant chain has many expansion opportunities, and its existing locations are also doing well and posting strong organic growth.
Last month, the company posted its second-quarter numbers for the period ending July 14. Sales totaled $233.5 million, rising by an impressive 35% year over year. Same-restaurant sales increased by 14.4%, with traffic-related growth accounting for the bulk of that increase (9.5%). The restaurant chain also launched a new grilled steak option, which it believes helped draw in more customers.
Not only did the company show impressive top-line growth, its profits also tripled, soaring from $6.5 million in the prior-year period to $19.7 million for the current quarter.
Given its strong results, it's no surprise investors have been buying up the stock, as it is one of the fastest-growing restaurant chains to invest in today.
The stock is trading at a hefty premium
While there's no doubt Cava has been doing well, the question is whether the stock's rapid increase in price has made it too expensive and put it at too high a premium. Since the start of the year, shares of Cava are up 165%, and that's with a recent pullback. That's a far better return than the S&P 500 and the 18% gains it has generated over the same time frame.
The consensus analyst price target for Cava is just under $107, which suggests that the restaurant stock has already climbed to a higher valuation than where analysts expected it would have gone in the short run. Here's how Cava stock is valued based on some key metrics investors might consider when buying a stock:
- Price-to-earnings ratio: 633
- Forward price-to-earnings ratio: 455
- Price-to-sales ratio: 16
- Price-to-book ratio: 22
Based on all these metrics, Cava appears to be trading at an extremely high premium. While that doesn't necessarily mean that it can't still generate a good return for investors, a high valuation could make it harder to do so, as it could turn away many investors.
Should you buy Cava stock?
Cava is an attractive growth stock, but it comes at too high a premium for it to be worth buying today, as its share price has arguably accelerated too fast. Investors may be better off buying other growth stocks instead.
Amid a slowdown in the economy and potentially worsening growth rates, a high-priced investment such as Cava could become vulnerable and have a lot of room to decline due to its valuation. While it can still grow and possibly generate positive returns, it's by no means a no-brainer buy at its current price. I would hold off on buying the stock, despite its strong earnings numbers.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
