Can Cava(NYSE: CAVA) be a millionaire-maker stock? Well, that obviously depends on how much money a person is willing to invest.
Cava trades at about $117 per share, as of this writing. Let's say that an investor buys 7,700 shares. In this scenario, those shares will cost a whopping $900,000. But if it goes up to $130 per share (a meager 11% gain), the stake would be worth $1 million.
Most investors don't have $900,000 lying around -- even a $10,000 investment is significant for many. For $10,000, one could purchase about 85 shares of Cava. But Cava stock would need to go up a whopping 100 times in value for it to be a millionaire-maker in this scenario.
In asking whether Cava stock is a millionaire-maker, what we're really asking is by how much can shares rise over the long term? My answer is that Cava stock will stay far away from hundred-bagger territory, as I'll explain.
What's going on with Cava?
Cava is a small Mediterranean fast-casual restaurant chain of 341 locations, offering different items on its menu that include lamb, falafel, and feta cheese. Differentiation can help it stand out, and the company indeed appears to getting consumers' attention.
Same-store sales (or same restaurant sales in this case) measure sales at Cava locations that have been open for a while. The company opened 18 new locations in the second quarter of 2024, which obviously boosts overall sales. But measuring same-store sales can show whether the brand is growing in popularity where locations have been open for at least a year.
For Cava, its second-quarter same-store sales were up more than 14%. For perspective, really any positive number is seen as a good thing. Double-digit growth is seen as a great thing.
Restaurant stocks usually struggle with profitability, but Cava is making it look easy. At the restaurant level, its Q2 profit margin was almost 27%. Even after accounting for other corporate expenses, the company still had a net profit margin of 7% in the first half of 2024, which is quite strong.
With growth and profits, Cava is a great restaurant business.
So what kind of returns can Cava stock bring?
As of this writing, Cava has a market capitalization of over $13 billion. Increasing 100 times in value would push it into the trillion-dollar club, which is unreasonable for a restaurant concept, no matter how promising it is. For perspective, McDonald's is the most valuable restaurant today, with a market cap of about $200 billion. I can't see Cava being worth more than five McDonald's in my lifetime.
What kind of long-term returns can Cava stock provide in a best-case scenario? Well, I'll keep things simple, using the company's current financials and management's long-term goals.
When it went public in 2023, Cava's management said it could have 1,000 locations by 2032. That's roughly three times as many as it has today. Let's add an extra layer of optimism to this and say it could open three times this number by 2044 -- In other words, 3,000 locations 20 years from now.
As of this writing, the average Cava location has $2.7 million in annual sales volume. Let's assume this more than doubles over the next 20 years to $6 million in average annual sales volume. If the company achieved 3,000 locations at this volume, it would have $18 billion in annual revenue.
To be clear, I'm projecting some aggressively optimistic growth assumptions here. But if Cava traded at 5 times this revenue assumption in 2044 (a generous valuation), it would have a market cap of $90 billion. From today's valuation, that's about a 10% annual gain for the stock.
What does this mean for investors today?
I've used some really optimistic numbers here for Cava over the next 20 years -- optimistic numbers it might not achieve. But achieving these numbers still might only yield modest annual returns -- even becoming a 10-bagger appears unlikely, in my opinion.
Therefore, I would say that Cava stock is not a potential millionaire-maker.
Cava is clearly a special restaurant company. It's rare that investors can find something that stands out from the crowd, has a viable path for growth, and sports a management team that is capable of generating strong profits. It belongs on a watch list at the very least.
Given that it trades at an exuberant valuation of 16 times its sales, I'd say that investors shouldn't expect millionaire-maker returns from today's price. But patient investors can still see positive long-term returns as long as the business continues on its current trajectory.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
