Cava Group Inc. (NYSE: CAVA) has been one of the best performing IPO stocks since it went public in June 2023. The fast-casual Mediterranean restaurant chain has seen its share price surge over 90% in just a few months. But is Cava stock a smart investment for 2024, or is the valuation getting stretched?
This in-depth analysis will examine Cava’s growth prospects, financials, risks, and valuation to determine if its stock is a smart investment for long-term investors in the year ahead.
Overview of Cava’s Business Model and Growth Strategy
Cava Group operates a chain of fast-casual Mediterranean restaurants across the United States, specializing in build-your-own bowls, salads, pitas, and more. The company focuses on fresh, high-quality ingredients inspired by Mediterranean cuisines, like hummus, falafel, lamb, and chicken.
As of Q3 2023, Cava has 290 locations in 24 states and Washington, D.C. This is up significantly from just 71 stores five years ago, showing the brand’s rapid expansion. Cava aims to open 15% more restaurants annually going forward. Management sees potential for 1,000 U.S. locations over the long run.
Cava’s growth strategy relies on increasing brand awareness and store counts. The company is also investing in its Cava Rewards program, menu innovation, and improving operations. Digital ordering for pickup and delivery has become a key sales driver.
Financial Performance and Growth Outlook
Cava has delivered stellar revenue growth since its founding in 2006. The company increased sales 50% year-over-year to $101 million in Q3 2023. Same-store sales were up a healthy 14% as well. For the trailing twelve months, revenue has reached $681 million.
Looking ahead, analysts forecast Cava’s sales to rise 33% in Q4 2023 and 32% infull-year 2024. Expanding its restaurant footprint and growing same-store sales should allow Cava to maintain 20%+ revenue growth annually.
On the bottom line, Cava has been unprofitable as it invests aggressively in expansion. But it achieved a positive net income of $13 million in Q3 2023 and is on pace to reach profitability soon. With scale, the company should see earnings accelerate thanks to operating leverage.
According to Yahoo Finance, analysts expect Cava to generate earnings per share of $0.26 in 2023 and $0.53 in 2024 as margins improve.
READ ALSO: What is an Online Broker: Demystifying the World of Online Trading
Bull Case: Growth Runway is Substantial
Cava bulls point to the massive long-term growth potential as the main reason to be optimistic about the stock. The company’s current 290 locations leave plenty of room for new restaurant openings before reaching management’s goal of 1,000 stores.
The rise of fast casual dining and increasing interest in ethnic cuisines like Mediterranean bodes well for Cava’s expansion. Millennials are also drawn to brands focused on fresh, high-quality ingredients. Cava checks all of these boxes.
Baird analyst David Tarantino recently upgraded CAVA stock to outperform with a $54 price target, about 32% above current levels. He noted that Cava has many similarities to Chipotle (CMG) in its early growth stages. If Cava can follow a similar trajectory, returns could be tremendous, given Chipotle’s 665% stock gain over the past decade.
Cava’s margins also have room for upside. In Q3 2023, restaurant-level operating margin hit 25% compared to just 14% two years ago. As volumes increase, operating leverage should boost profitability and cash flow. Cava looks well-positioned for sustained 20%+ growth in both revenue and earnings over the next five years if it can continue expanding.
Bear Case: Intense Restaurant Competition
Cava bears will point out that the restaurant industry is notoriously difficult. The company faces competition from both full-service chains and other fast-casual concepts. The Mediterranean and Greek categories in particular have seen many new entrants lately.
While Cava’s growth has been impressive so far, there is no guarantee it can sustain the rapid expansion. Real estate constraints, cannibalization of existing stores, and execution missteps could all slow the pace of new unit openings. Plus, same-store sales growth is bound to moderate as the store base matures.
And without a proven economic moat yet, Cava could struggle to hold off rivals and maintain its niche. The company does not have the scale, brand awareness, or pricing power of restaurants like Chipotle or McDonalds. Staying relevant among consumers will be an ongoing challenge.
If new store development or same-store sales growth stalls in the years ahead, Cava’s stock would likely see a sharp pullback given the high expectations baked into the current valuation.
Valuation and Expected Returns
After rocketing over 90% since its IPO, CAVA’s forward price-to-earnings ratio now exceeds 340. This seems to discount a lot of future growth potential.
Upside from current levels may be limited in 2024 unless the company can significantly exceed forecasts. Analysts’ average 12-month price target of $45.60 suggests shares are fully valued.
That said, Cava still seems to offer reasonable upside for long-term investors. Revenue and earnings growth in the 20%-30% range could support additional share price gains if sustained over the next five years.
Plus, any partnerships or accretive acquisitions by Cava would boost the bull case further. But likely returns seem more muted in the near term, barring any surprises.
Key Factors and Metrics to Monitor
Here are a few of the most important indicators for investors to watch that will impact Cava’s stock performance in 2024 and beyond:
- New unit openings – Annual store growth is arguably most critical to Cava’s outlook. Watch that management can sustain 15%+ restaurant expansion through real estate availability and operational execution.
- Same-store sales growth – Track how comparable stores perform as newness wears off and competition arises. This will signal if Cava’s concept has lasting appeal. High single-digit growth would be positive.
- Profitability – With scale, Cava should see restaurant-level margins head above 25% and begin generating meaningful profits. Look for improving ROIC.
- Cash flow – Rising cash from operations will allow Cava to fund growth internally rather than rely on equity issuance. Sustained negative FCF could pressure the stock.
- Consumer sentiment – Monitor reviews, customer feedback, and brand perception. This qualitative data helps gauge Cava’s competitive positioning and repeat customer loyalty.
- Management commentary – Listen to executives on quarterly earnings calls for hints about growth confidence. Changes to long-term guidance should impact sentiment.
READ ALSO: Trading Psychology: How to Control Emotions While Trading
Is Cava Group Stock a Buy, Sell, or Hold?
Cava has undeniable growth attributes that could allow its stock to continue outperforming as the company expands. But shares also look fairly valued currently. The bull case holds more weight for long-term investors than those with shorter time horizons.
Aggressive investors comfortable with high valuations could buy CAVA stock on dips. More risk-averse investors may want to wait for lower entry points or proof that business momentum will persist. An overweight position seems warranted, but caution is still prudent.
In summary:
- Cava’s growth trajectory remains strong, supported by store openings and positive comps.
- Margin expansion potential as volumes increase is a key upside driver.
- Valuation is fully factored into high future growth assumptions.
- Competition and difficult restaurant industry dynamics pose risks.
- Long-term upside merits an overweight position for risk-tolerant investors.
To Recap: Bullish Long-Term but Use Caution Near-Term
Cava has emerged as one of the most promising young restaurant growth stocks. The company has significant white space to expand by opening hundreds of new locations in the years ahead. Profitability should ramp up nicely as Cava gains scale.
However, it remains to be seen if the company can maintain strong unit growth and fend off fierce competition. The current valuation leaves little room for error. While long-term oriented investors have reason for optimism, a more cautious stance may be prudent until Cava establishes an economic moat.
Monitoring new store development, sales trends, cash flows, and margins can provide clues into whether Cava’s early success is sustainable. Taking a balanced approach toward both the risks and opportunities leads to the conclusion that CAVA stock is a buy for aggressive investors and an overweight holding for more conservative shareholders over the long run.
FAQs About Cava Stock
Is Cava profitable yet?
No, Cava is not consistently profitable yet, as it invests heavily in growth. But profitability is within sight. The company earned positive net income of $13.3 million in Q3 2023 after losses previously. With more scale, Cava should deliver full-year profits soon.
Does Cava pay a dividend?
Cava does not currently pay a dividend to shareholders. The company is focused on reinvesting cash flows into expanding its business footprint rather than returning capital. Dividend payouts typically only occur once companies reach mature growth stages.
Is Cava stock overvalued?
Cava’s valuation looks quite full relative to current profitability. The forward P/E ratio exceeds 340. But high multiples are often warranted for high-growth stocks like Cava. The valuation is reasonable assuming 20%+ revenue and earnings growth continues. Still, shares have a limited margin of safety.
Who are Cava’s main competitors?
Cava competes with other fast-casual Mediterranean concepts like Zoe’s Kitchen, Naya Express, and The Hummus & Pita Co. More broadly, all fast-casual and quick-service restaurants battle for consumer wallet share, like Chipotle, Panera Bread, and Sweetgreen. Mainstream chains like McDonald’s and Starbucks also compete for traffic.
Does Cava stock have options?
Yes, options trading is available for CAVA stock. Investors can buy and sell CAVA calls and put options contracts to speculate on price movements or hedge their stock positions. Both the NASDAQ Options Trading Floor and other online brokerages facilitate Cava options trading.
Will Cava be acquired?
Acquisition potential down the line makes Cava an appealing investment. Larger restaurant companies could view Cava as an attractive takeover target once it achieves greater scale and brand recognition. However, no credible acquisition rumors are circulating currently, and Cava seems focused on remaining independent.
In another related article, Top 10 High-Yield Dow Dividend Stocks
