Cava Group (CAVA 4.89%) was one of this year's hottest new IPOs. The Mediterranean-style fast-casual restaurant chain has been hugely successful in growing its operations and drawing in customers. But its margins are thin, and profits haven't been all that impressive. And despite seemingly improving quarters, the stock can't seem to pick up any steam of late.
Has the hype died down around this stock, and is Cava a stock worth buying today?
Have investors forgotten about Cava stock?
When shares of Cava Group first went public in the summer, there was plenty of excitement around the business, which investors and analysts often compare to Chipotle, for its growth potential. But in recent months, things have slowed significantly for the restaurant stock. Here's how sharply trading volumes have dipped:
CAVA 30-Day Average Daily Volume data by YCharts
As that excitement has died down, there hasn't been the same bullishness propping the stock up. Since going public, the stock is now down 20%. That's a sharp turnaround from August, when its shares were up by 20%.
Cava's results remain strong
Despite the lack of bullishness, Cava's business has been looking good of late. On Nov. 7, the company reported its third-quarter numbers, which remained impressive. Cava reported sales of $173.8 million for the period ended Oct. 1, which was a 50% improvement from the prior-year period. And its same-store sales growth rate was stellar at 14.1%. Chipotle, by comparison, reported comparable store sales growth of just 5% for the same quarter.
The one area where Cava falls short when compared to Chipotle is that its bottom line isn't nearly as strong. While Chipotle easily generates profits, Cava is much more modest in that respect. But it's also a young company that recently went public, so investors will need to be patient. The good news is that it's coming off yet another profitable period. Cava Group reported net income of $6.8 million last quarter, which is a considerable improvement from the $11.9 million loss it incurred this time last year.
Cava still has a long way to go and to prove to investors that it can remain profitable at a high level the way Chipotle has been able to do, but it is showing progress.
CAVA Profit Margin (Quarterly) data by YCharts
Should you buy Cava stock?
Cava's business is still in its early growth stages, and the numbers it is reporting are encouraging. Not only is it generating some solid growth, but it's already profitable. And over time, its profit margins can improve as it benefits from economies of scale. According to Wall Street and the consensus analyst price target of $47, the stock has an upside of at least 35% -- and that's in the short run (price targets are normally set for the next 12 months or so).
If you're a long-term investor willing to buy and hold, Cava may be an underrated stock to buy right now. While many investors have seemingly forgotten about it, this can be an excellent investment to add to your portfolio today.
