Cava Shares Experienced a 243% Surge in 2024. Should Investors Continue Buying?
Cava Shares Experienced a 243% Surge in 2024. Should Investors Continue Buying?
Cava Group (CAVA shedding -0.73%) is one of the steamiest restaurant growth stocks to make an appearance in a while. The company has delivered impressive growth, which has pushed the shares up a whopping 243% this year.
Discovering budding restaurant brands before they become commonplace in every household can yield fantastic returns over the years. Cava's profitable expansion strategy could achieve this, but after tripling in value this year, are the shares still worthwhile today?
Cava is plugging a significant gap in the restaurant industry
Cava's eateries are performing exceptionally well, and this speaks volumes about the potential to cater to the demand for Mediterranean cuisine with the speed and efficiency of Chipotle Mexican Grill. Revenue surged by 39% in the year-ago quarter, as it continues to open more restaurants. What's more impressive is Cava's same-store sales, which grew by 18% year over year, driven by robust customer traffic and increased menu prices.
Investors won't find many restaurants, big or small, generating that level of growth in a challenging economic climate. It not only indicates a hidden demand for healthier options in the restaurant industry, but Cava seems to be constructing a top-notch restaurant operation that could generate substantial wealth for shareholders over the long term.
As of Oct. 6, there were only 352 Cava restaurants, a small foothold compared to larger restaurant chains. Chipotle, for example, had over 3,600 locations worldwide at the end of the quarter.
It's delivering profitable growth
Smaller restaurant chains often take time to build scale and report a healthy profit margin. One reason Cava's stock has performed so well is that the company's restaurants are delivering strong top- and bottom-line growth. Its net profit more than doubled over the year-ago quarter to reach $18 million, and management notes that new restaurants are outperforming expectations.
"We believe the category is at a turning point, and as evident from our accelerating growth in each market we enter and with every restaurant we open," CEO Brett Schulman stated on the company's earnings call.
Cava's restaurant-level profit margin looks impressive at 25% for the quarter, similar to Chipotle's restaurant-level economics. Cava's ability to show a profit at this early stage of growth is promising, but the issue is that Wall Street already acknowledges the similarities between these companies' business models and is pricing Cava shares accordingly.
But the stock's valuation is expensive
Cava shares trade at a price-to-sales (P/S) ratio of around 20, which is excessively high compared to other world-class restaurant operators such as Chipotle, which also trades at a costly P/S multiple of 7.4 times sales.
Investors might be lured into buying Cava shares due to the massive return potential. After all, a $1,000 investment in Chipotle in 2009 would be worth $33,000 today. However, Chipotle was trading at a lower P/S multiple of 1.86 in 2009, allowing investors to fully benefit from its growth.
Investors shouldn't pay a high sales multiple for Cava shares in the hopes of earning Chipotle-like returns. The fastest-growing business in the world can be a poor investment at the wrong price. Cava has the potential to become a wealth-building investment, but investors should be patient and wait to buy shares at a lower valuation.
Cava's impressive financial performance has attracted investor interest in the stock market. With its strong same-store sales growth and increasing profit margin, the company's revenue and net profit have seen significant improvements, making it an attractive option for those interested in investing in the finance sector. However, the current high price-to-sales ratio of Cava shares might deter some investors who believe that the stock's valuation is currently excessively expensive.