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The S&P500 has had a solid year, with a total return of 19% (as of August 28). This momentum builds on 2023’s massive surge.
But there’s one thriving stock that has significantly outperformed the broader index. So far in 2024, it is up 175%. As if those gains weren’t remarkable enough, this company’s stock has even outperformed the AI powerhouse. Nvidia this year, a company that investors can’t get enough of.
But is it too late to buy this monster? restaurant inventory?
Cava’s growth potential
Investors might be surprised to hear that the company is posting such impressive profits Cava (NYSE: CAVA)the operator of Mediterranean-inspired fast-casual restaurants across the country. The company has won over investors who are excited by its strong financial performance and growth prospects.
During the second quarter of fiscal 2024 (ending July 14), Cava reported a year-over-year revenue increase of 35.2%. This was driven by robust same-store sales growth of 14.4%, a clear indication that foot traffic and pricing remain solid despite macro uncertainty.
The most important part of Cava’s story, however, is the rapid expansion of its store base. After opening a net 18 new locations in the second quarter, there are now a total of 341. Cava says the average restaurant brings in $2.7 million in annual sales volume, with excellent restaurant-level earnings before interest, taxes, depreciation and amortization (EBITDA) margin of 26.5% (this figure excludes operating costs). This unit economics is not far behind the market leader Chipotle Mexican Grill.
The management team has set its sights on a big goal. The goal is to have a thousand stores open by 2032, which represents an approximately threefold expansion compared to the current size. If everything goes according to plan, returns will certainly be substantially higher.
Cava generated $16.1 million in operating revenue in the latest quarter, which was almost triple the total in the second quarter of 2023. Profitability was helped by better utilization of certain expenses. As the company grows, investors hope that profits will grow faster than sales.
It leaves investors hungry for more
After seeing a stock almost triple in about eight months, I don’t think anyone would disagree with the statement that the market is incredibly excited about Cava’s prospects. The momentum is hard to ignore.
However, smart investors will focus on the valuation. Cava stock trading in nosebleed area. If you wanted to buy the shares, you would have to pay an amount future price-earnings ratio of 270. That is almost twelve times the valuation of the S&P 500 and more than five times higher than Chipotle.
At its current valuation, I don’t believe Cava presents a smart buying opportunity. For investors who missed this year’s rally, it may even be too late. There is so much optimism in it that there is no margin of safety left. There is actually an additional risk if the market loses interest or if Cava’s growth slows.
I wouldn’t be surprised if this happened. The company’s recent financials are impressive, but I would argue that Cava has not yet developed a sustainable competitive advantage. Chipotle, whose success in recent years has been truly remarkable, has a strong brand known for its quality and value. And its size is likely to result in cost advantages when sourcing key food inputs and paper products or when choosing real estate.
At its current scale, Cava most likely does not possess the beneficial qualities essential for continued success in the highly competitive restaurant industry. Perhaps this will change in the coming years as it expands the store base and can increase revenues.
Even if my assessment of the quality of cava is incorrect, that does not alter the fact that the share’s valuation is sky-high. This is a business investor that should remain on the watchlist for the time being.
Should you invest $1,000 in Cava Group now?
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Cava Group and recommends the following options: Short September 2024 Put $52 on Chipotle Mexican Grill. The Motley Fool has one disclosure policy.
1 Monster Stock to Rise 175% in 2024: Should You Buy or Is It Too Late? was originally published by The Motley Fool