Cava Group (CAVA 10.50%) is one of the big stories of 2023. It's one of the few companies that have decided to go public amidst a bear market and tumultuous economy, but the timing was right, and the initial public offering (IPO) took place just as some indications showed the end of the bear market.
The stock exploded onto the market, ending its first day with a closing price of nearly $43, or almost double the IPO price of $22. Now, a month later, it's up another 18%. That's a lot of movement for a short amount of time.
Many are comparing Cava to fast-casual king Chipotle Mexican Grill (CMG 2.41%), which has been an incredible stock to own over time. Is it time for it to move over for the new kid restaurant on the block? Let's see which of these two stocks has better odds today.
The case for Cava: new and fresh
The main investing thesis for Cava stock is that it's just getting started. If you'd invested in Chipotle when it was just starting out, you'd be 4,500% richer today. That kind of potential is very compelling. Cava is demonstrating momentum, and that's catching investors' eyes, especially when there are so few IPOs in today's market.
Cava is a similar idea to Chipotle, the original fast-casual cuisine: fresh, healthy food at a moderate price point. Chipotle does it with Mexican food, while Cava does it with Mediterranean food. Cava operates 263 locations and expects to open another 34 to 44 this year. It also owns Zoe's Kitchen. Management sees the opportunity to have 1,000 restaurants by 2032, and it plans to expand into new markets in the U.S.
One thing that stands out is Cava's comparable sales (comps), which have routinely been in the low double digits. That's growth coming from existing restaurants, and it demonstrates customer engagement and loyalty.
The restaurant-level profit margin is 20%, which is solid unit economics. That doesn't take into account overall company expenses, but it's a viable model that should lead to company profits as Cava opens new restaurants and scales. That will be one of the most important things to watch over the next few years as Cava grows: Does opening new restaurants bog it down in increased expenses, or can Cava do that efficiently and become profitable?
If the business continues to progress with strong revenue growth and reaches profitability, owning Cava stock could lead to incredible gains.
The case for Chipotle: old, and still fresh
It's easy to argue that Cava is new and has a long growth runway, but don't count out companies that have already achieved success. In terms of a growth runway, while Cava sees an opportunity to about quadruple its store count over the next nine years, Chipotle sees an opportunity to double its store count at the same time, for a total of 7,000 stores. And this is a company that has already demonstrated that it can scale profitably.
As established as it is, it's also still increasing comps in the double digits, along with net profits. Total revenue increased 17% in the 2023 first quarter over last year, with comps up 11%. It has very strong unit economics, with a restaurant-level operating margin of 25.6% in the first quarter.
Investors love Chipotle, and for good reason. The formula works, and it's likely to keep going.
It's a different landscape today
Cava stock debuted at a high price and it's already richly valued, trading at a price-to-sales ratio of around 10. It's hard to call Cava a bargain, but if it continues to demonstrate strong growth and becomes profitable, it could be a multi-bagger over time.
However, it's still an unproven model, as well as it's been doing. Scaling up is challenging, and many restaurant stocks that were supposed to be the next Chipotle didn't make it. There are only a handful of truly great restaurant stocks that have achieved phenomenal returns over time.
When Chipotle went public, it had about double Cava's store count, and it had been profitable for three years. Perhaps coincidentally, its stock also closed the first day at $42, so there many parallels here. A few weeks after its IPO, shares were trading at a price-to-sales ratio of 2.3, and a price-to-earnings ratio of 47. That highlights how some percentage of Cava's growth is already priced into a somewhat inflated valuation for Cava stock at current levels.
To me, this contest boils down to investor risk tolerance level. If you see the potential with Cava stock, have a long-enough time horizon, and enjoy a higher risk level, you might be interested in Cava stock. If you're an investor that appreciates a proven model and believes in a winners-keep-winning approach, you can feel comfortable that your money is likely to increase over time with an investment in Chipotle stock.
Which one is more likely to skyrocket? In the short term, at least, probably Cava. But it's also a riskier play, and long-term, you should buy the stock that fits your tolerance level.
