Cava Group (CAVA 10.50%) was a standout initial public offering (IPO) stock when it went public last June in a dry IPO year. But it's gone on to impress investors with continued growth and three quarters of positive net income.
Yet, buying Cava stock at this point is still a risk; it has a small store count and short history. But it also has an incredible opportunity, and management is demonstrating strong efficiency skills. Is it worth buying right now? Here are two reasons it could soar this year, and two reasons it could flop.
Why Cava could soar this year
Cava, which aims to serve healthier Mediterranean-style food, opened 72 stores last year and had 309 stores in 24 states as of the beginning of 2024. It is seen by some as the next Chipotle Mexican Grill, which has become an incredible chain of more than 3,400 stores and has delivered wild market-beating gains over its lifetime.
It's not surprising that investors want in on a new stock that has the potential to mimic Chipotle's success. Cava sees the opportunity for 1,000 stores across the U.S. by 2032. That could be a massive revenue generator over the next few years. If current popularity is any indication, it's reasonable to imagine that Cava could pull this off. It plans to open about 50 stores this year.
Cava is also becoming profitable at scale, which is always a big goal for young growth companies. That's the second reason it could soar this year. Revenue increased 60% year over year in 2023 to $717 million, with an 18% increase in comparable-store sales (comps).
Growth in comps is an important indication of customer sentiment, and it leads to improved profitability since stores achieve more profit per unit when they can spread out fixed costs more effectively. Cava reported a full-year profit of $13.3 million in 2023 compared to a net loss of $59 million in 2022.
Why Cava could flop this year
However, there are also reasons Cava could sink this year. One is that comps growth is expected to sharply decelerate from 18% to about 4%. From the outset, management says that it's been benefiting from a halo effect caused by the news surrounding its IPO. That's set to diminish, and growth related to price increases will also be lapped this year.
That 4% is pretty low comps growth, especially for a young company. On the flip side, there's a smaller percentage of stores in the comps group; as it expands, comps could increase, too. This is something to keep an eye on.
The other concern for Cava stock is its high valuation. When an eye-catching company hits the scene, investors hear about it quickly, and everyone wants in. That pushes up the share price. Cava stock trades at a price-to-sales (P/S) ratio of 9 and a forward price-to-earnings (P/E) ratio of 211. That's quite rich no matter how well it's doing, and it might not be able to carry such a high valuation at expected growth rates.
CAVA PS ratio data by YCharts.
Should you buy Cava stock?
There's definitely risk here. Cava stock isn't cheap, and for all its excellent performance, it hasn't been at this long enough or had a large enough store count to say it's a sure thing.
That said, the opportunity looks compelling, and management is effectively growing the company without driving it into debt -- it actually has no long-term debt right now.
In this case, investors who have an appetite for risk might want to take a small position in Cava, and as it grows, they can add to it. Other investors should sit it out and follow Cava's progress for now.
