One of the hottest food stocks to own this year has been that of Cava Group (NYSE: CAVA). The Mediterranean restaurant chain went public last year, and while it didn't get off to a great start, 2024 has been a much better year for the stock. Year to date, Cava's valuation has risen by more than 220%, and it's currently trading around its 52-week high.
What's behind the stock's impressive rally, and is Cava still a great buy today?
Cava has been an unstoppable growth machine
A big reason Cava is able to attract a lot of growth investors is due to the impressive growth numbers it generates. Not only is the company growing organically, it's also aggressively launching more locations to spread its reach and penetrate new markets. And although its growth rate has slowed down from the monstrous levels it was at a year ago, the business' sales are still expanding by more than 35%.
CAVA Operating Revenue (Quarterly YoY Growth) data by YCharts.
What is more impressive, however, is that the company isn't just benefiting from the launch of new stores -- it's also delivering strong organic numbers. For the period ending July 14, Cava reported same restaurant store sales growth of 14.4%. This figure simply takes into account the same restaurants that were opened a year ago. Many restaurants generate comparable sales growth that's in single digits, and Cava's ability to increase at well into double digits is an encouraging sign that its restaurants are proving to be popular.
The company is also expanding its footprint. As of the end of the quarter, its restaurant count was up to 341, which is a 22% increase from a year ago.
Is Cava's stock too expensive?
There's no doubt that Cava makes for a great growth stock these days, but the big question is whether the premium investors are paying for it is simply too high. A way to compare it is with respect to revenue and earnings. Here's how it stands up against Chipotle Mexican Grill, a top restaurant stock investors often compare it to.
CAVA PE Ratio data by YCharts. PE = price-to-earnings. PS = price-to-sales.
When compared by both revenue and earnings, investors are paying a far higher multiple for Cava Group. The counterpoint would be that Cava is at a much earlier stage in its growth than Chipotle is, and thus, a higher multiple may be justifiable. But given Cava's surging valuation in recent months, I'd argue that the gap is perhaps too wide right now on both of these metrics.
Should you buy Cava Group stock?
I'm optimistic that Cava can still continue to grow in value in the long run as it invests in more growth opportunities. But its steep valuation suggests that a lot of future growth is already priced into the stock's price today. The danger for investors is that buying at such a high price could limit your potential to earn a significant return from the stock down the road.
While the stock may rise higher in the near future -- especially if its upcoming quarterly results are strong yet again -- investors may want to temper their expectations, as this isn't a cheap investment to own. I'm not sure how much higher the stock could go, but Cava could reach a peak sooner rather than later. Given its high price, investors may be better off pursuing other growth stocks instead.
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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 December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
