Cava Group (CAVA 1.29%) is a fast-casual Mediterranean-themed restaurant chain. It is fairly new to the public market and only has a few hundred locations across the U.S. As a company, it has been growing fast and has material growth plans.
After an over 100% stock advance in a year, have investors missed out on this stock? Probably not, but Cava is only appropriate for growth investors willing to tolerate some potential volatility.
Cava's valuation metrics are terrible
Cava's price-to-earnings (P/E) ratio is in the hundreds. Depending on your data source it can be as low as 225 or as high as 962. However, the exact number here doesn't really matter, because a P/E that's measured in the hundreds is incredibly high. If you care at all about valuation you will not be interested in Cava.
Making things even more difficult, even for growth investors, is the fact that Cava is a fairly young company so there's no long-term track record to which one can compare the current P/E. In other words, there's no way to figure out if the P/E is high on an absolute level but within the range of normal for Cava.
The over 100% stock gain over the past year hasn't helped the stock's valuation any. That said, Cava's stock price is near the highest point in its history. Granted, the history only started when the company held its initial public offering (IPO) in mid-2023. But, still, the stock has risen a great deal in a very short time, pricing in a lot of good news when you add in the massive P/E ratio.
There's a good reason to believe that investors have missed out on buying Cava. Only this is a small growth stock with a rapidly expanding geographic footprint. If you can stomach buying a stock that looks stretched based on traditional valuation metrics, there's a key comparison that needs to be considered.
Cava and Chipotle: Similar but different
Chipotle Mexican Grill (CMG 0.39%) has been a huge success story. Not surprisingly, there have been a lot of other food brands that have tried to replicate its basic business approach. Simply put, Chipotle staff help customers to create freshly made Mexican food, to order, from an assembly line. That is exactly what Cava does, too, only Cava's theme is Mediterranean food.
This comparison is vital to understand because it backs the long-term growth thesis behind Cava. Right now Cava operates around 325 or so restaurants. Chipotle runs nearly 3,500. So Cava is less than a tenth of the size of Chipotle, which hints at the long-term growth opportunity ahead if Cava can keep expanding its business.
That is, not surprisingly, the goal. Cava opened 14 new locations in the first quarter of 2024, an over 20% increase in the store base year over year. That's a huge change that's only really possible because of the still small store count. But it speaks to the growth potential over the long term. Even if Cava doesn't get as large as Chipotle, there are still years and years of store openings ahead. That's the opportunity that investors are buying into. The real question is whether or not you want to follow along.
Execution is going to be key for Cava
At this point, there's no reason to believe that Cava can't continue to open new restaurants for years into the future. If it does it may grow earnings and justify the currently ridiculous P/E ratio. But Wall Street has a habit of pushing young restaurant chains to chase growth at any cost, which, in the end, can lead to strategic errors that blow a company up. If you can look past the valuation issue to buy Cava you'll want to monitor the company's execution very closely. Yes, it could be the next Chipotle, but it could also fall well short of that goal. This is a stock best suited to aggressive investors.
