A top restaurant stock to own this year has been Cava Group (CAVA -6.24%), up an impressive 60% thus far. Investors have been bullish about the Mediterranean fast-casual restaurant brand and its ability to cater to a broad and diverse customer base, which could make the chain more resilient amid a challenging economy.
But while the company has been achieving some strong results in recent quarters, has the stock become too hot to buy right now, or could shares of Cava still soar higher?
The company is coming off a strong 2023
In February, Cava reported its fourth-quarter and year-end results. For the quarter ending Dec. 31, 2023, the company's revenue totaled $177.2 million and grew by 36% year over year.
The company has not only been opening more locations, but its existing stores have also been producing strong numbers. Comparable-restaurant sales (comps) were up by more than 11% in the fourth quarter. That's a great sign that demand remains strong and growing.
For the full year, Cava's comps growth was even higher at just under 18%. The impressive results have helped the company attract many growth investors. During the full year, the company opened 72 new restaurants. And in 2024, it expects to open between 48 and 52 new locations.
But despite the great showing of late, there are some red flags that could make investors think twice.
Has Cava's stock become too expensive?
Cava has been posting strong results, but the business also expects things to slow down. It is opening more stores, but the company projects that this year, its comps will rise between just 3% and 5%. That's a sharp slowdown from the 18% comps growth it achieved last year.
Opening more locations can be a good way to create growth, but that comes with more overhead and expenses, which might not necessarily result in a stronger bottom line. And its bottom line isn't all that strong to begin with.
In 2023, Cava reported just $13.3 million in net income on $728.7 million in total revenue, for a profit margin of just 1.8%. Based on analyst estimates of future profits, Cava is trading at a forward earnings multiple of 313.
That's a steep valuation for any growth stock. Even when looking at its revenue multiple, it is expensive compared to several other restaurant stocks, which also happen to be more profitable than Cava.
P/S ratios data by YCharts.
Wall Street also believes the stock has peaked, with the consensus analyst price target of $56.50 per share implying that the stock could fall by at least 17% from where it trades right now.
Cava's stock is certainly trading at a big premium, and the question for investors is whether it's worth it or not.
Should you invest in Cava stock?
Cava's business did well last year, but the modest comps growth it is expecting this year is what would prevent me from buying the stock right now. Its growth story appears to depend too heavily on new store openings. And while that's a good way to manufacture growth, it's organic growth that investors should focus on -- and that number is slowing down.
At such a high premium to earnings and revenue, Cava just isn't doing enough to show that it is worth its nearly $8 billion valuation. Until the company can show investors that it can post strong profits and not depend on new store openings to generate a high growth rate, this is a stock I would avoid for the time being.
