Shares of Cava Group(NYSE: CAVA) are having a fantastic year, as they satisfy the appetites of hungry investors. As of April 12, the stock has surged 48% in 2024, beating the S&P 500 by a wide margin.
This mid-cap restaurant stock is starting to win over the market. And given its strong performance, you might be considering adding shares to your portfolio. Before doing so, there are three things you need to know.
Rapid expansion
Cava might fly under the radar given that it doesn't have the scale and wide reach of a business like McDonald's or Starbucks. But that's precisely why it's attracting Wall Street's attention. There is meaningful growth potential.
As of Dec. 31, Cava operated 309 restaurants across the country, up 30% from the year before. And the plan is to open 50 new stores in 2024. But over the very long term, executives believe the chain could have 1,000 locations open by 2032. That would translate to a more than threefold expansion.
At that size, Cava would certainly be generating significantly greater revenue. And it could become a household name in the competitive restaurant sector.
I believe there are two key trends working in Cava's favor right now. One is the popularity of the fast-casual concept that prioritizes value and quality for consumers. Another tailwind is simply a growing interest in health and wellness, particularly in light of the COVID-19 pandemic.
I know that Cava's most bullish supporters hope that this enterprise can one day get to Chipotle Mexican Grill's level. The Tex-Mex chain has 10 times the number of restaurants Cava does.
Looking at the financials
It's not surprising that Cava's top line has posted outsize gains. Revenue in 2023 totaled $717 million, a 60% year-over-year increase. Opening new stores, while generating more sales per store, creates this growth. I think this is what investors are most excited about.
But typically when a company plows all its resources into expansion initiatives, there are no profits. Cava might be in the early innings of bucking this trend.
Yes, the business posted a net loss of $59 million in 2022. However, that swung to a profit of $13 million in 2023. This year, management believes Cava will produce adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $89 million (at the midpoint), which would be higher than last year's total. This should result in higher net income in 2024. That's definitely an encouraging trend.
Of course, the hope is that with greater scale being achieved, the bottom line starts to expand at a faster rate than revenue. Investors need to pay close attention to earnings trends going forward. In theory, Cava should be able to better leverage some of its fixed expenses, like corporate overhead and marketing costs.
Lofty expectations
At its all-time-low price, in late 2023, Cava traded at a price-to-sales (P/S) ratio of 4.2. Even at a point when investors were souring on the business, I view that valuation as expensive.
After the stock's massive rally in recent months, it trades at an even loftier valuation. The market is selling shares at a P/S multiple of 8.7 right now.
It's never a good idea to overpay for a stock. All else equal, this limits the upside for solid returns, while at the same time adding downside risk should the company not live up to the optimistic expectations investors might have for its prospects.
If Cava stock is on your watch list, I believe understanding its growth story, its financial picture, and its valuation can help you make a more informed investing decision.
Should you invest $1,000 in Cava Group right now?
Before you buy stock in Cava Group, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Cava Group wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 15, 2024
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
