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Is It a Once-in-a-Generation Investment Opportunity?

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In the past five years, Chipotle has crushed it for shareholders, skyrocketing 340%. The Tex-Mex fast casual concept is still expanding rapidly, while posting incredible profitability. It makes sense that investors seeking the next big industry winner are now taking a closer look at Cava (NYSE: CAVA), a much smaller chain.

This surging restaurant stock is already up nearly 90% year to date. Does this powerful momentum make Cava a once-in-a-generation investment opportunity?

Big growth plans

Cava focuses on Mediterranean food, using a similar model to Chipotle that allows hungry patrons to build their own salads, grain bowls, or pitas. Clearly, this is catching on with consumers. Management points to a growing interest from the general public in making healthy food choices as a key tailwind, and Cava’s fast-casual approach only increases accessibility and convenience for its customers.

Despite inflationary pressures and general economic uncertainty, Cava continues to put up strong growth figures. In 2023, revenue jumped 59.8%, boosted by 72 new store openings and a 17.9% same-store sales growth. Last year’s sales figure of $729 million was 518% higher than five years ago in 2018.

Businesses that are investing aggressively in growth initiatives typically aren’t profitable, so it might be surprising to learn that Cava bucks this trend. It registered $13.3 million in net income last year after posting a $59 million net loss in 2022. The hope for shareholders is that consistent and rising earnings will become the norm.

By 2032, the executive team believes it can have 1,000 locations open across the U.S., up from 309 (as of Dec. 31, 2023). This growth potential is probably what investors are most excited about.

High expectations

It should come as no surprise that investors hope Cava can mirror the long-term success of Chipotle. Even with 3,500 existing locations, the fast-casual leader is expanding at a blistering pace with 271 store openings last year. Shares have been a huge winner for investors, thanks to the strong revenue and earnings growth that show no signs of slowing down.

The resulting expectations for Cava are high, and the stock trades at a price-to-sales ratio of 11.1, a 30% premium to Chipotle. I’m not sure if this steep multiple is warranted.

Cava’s valuation implies that management’s long-term target of opening 1,000 stores is a virtual certainty, perhaps at an even faster pace than the leadership team’s 2032 deadline. But I’m not as confident.

Growth is already forecast to slow dramatically. The company plans to open 50 net new locations (at the midpoint of guidance) in 2024, a meaningful drop from last year. Even worse, same-store sales are only set to rise 3% to 5%, an extremely disappointing outlook given the company’s double-digit growth last year. For comparison’s sake, Chipotle is projecting mid- to high-single-digit comparable-sales growth this year, even though it’s already a much bigger enterprise that’s further penetrated in the U.S.

Competition is a critical factor investors can’t ignore. The restaurant sector is perhaps the most competitive in the world, and finding lasting success is extremely difficult. Cava has to constantly win over diners who are overwhelmed with options  — even the Mediterranean category is crowded with lots of choices. Without an economic moat, I have my concerns about the company’s success over the next decade and beyond.

To its credit, Cava is developing name recognition that people are excited about, but that’s not enough to make it a once-in-a-generation investment opportunity right now.

Should you invest $1,000 in Cava Group right now?

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.

1 Magnificent Stock Up 89% in 2024: Is It a Once-in-a-Generation Investment Opportunity? was originally published by The Motley Fool

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