CAVA Group stock rallies amid comparison with Chipotle

CAVA Group (CAVA) is one of the fastest-growing casual dining companies in the United States. The company focuses on Mediterranean meals, which are becoming more popular in many cities in the country. 

Listed in 2023, CAVA Group’s stock has gone parabolic, bringing its market cap to over $13 billion. It has risen by over 165% this year, beating other restaurant stocks like Chipotle, Yum Brands, and McDonald’s. 

CAVA Group’s growth happened as its revenue and the number of stores has continued to accelerate. Its annual revenue has moved from $500 million in 2021 to over $728 million in 2023.

Additionally, investors compare its growth trajectory with Chipotle Mexican Grill, a company whose stock has soared by 235% in the last five years, pushing its market cap to over $76.8 billion. 

The two companies are largely similar, with the only difference being the types of food that they offer. Chipotle sells Mexican foods while CAVA focuses on Mediterranean dishes. They are both adding more stores and growing their online or takeout segments.

CAVA Group stock was trading at $114 on Tuesday while its HypeIndex rose by 120%.

Positive hype

• CAVA Group’s main catalyst has been its strong financial results, which were stronger than expected. Its quarterly revenue rose to $231 million, beating the median analyst estimates by $14 million. Also, its profit per share of 17 cents was higher than expected. 

• The results also showed that the company’s digital mix increased to 35.8% while the same restaurant sales growth was 14.4%. 

• CAVA’s revenue growth was 35%, higher than Chipotle’s 18%, which is understandable since the two are in different phases of their growth.

• The company hopes that its store openings trajectory will continue this year. Its guidance is that it will open 54 to 57 stores, up from the previous guidance of between 50 and 54. 

• CAVA also boosted its same restaurant sales target to between 8.5% and 9.5%. 

• Wall Street analysts expect that CAVA Group has more room to grow as its brand becomes more popular in the US. As such, the expectation among analysts is that its annual revenue will hit $934 million in 2024 and then cross $1 billion in 2025. 

• In addition to the US, CAVA has room to grow internationally. One approach would be to invest in countries that Chipotle has gone to in the last few years. Some of these companies are France, Germany, UK, Canada, and Australia.

• Studies show that the Mediterranean restaurant industry is expected to grow from over $33.4 billion in 2024 to over $40 billion by 2030. CAVA will likely benefit if these studies are accurate.

Negative hype

CAVA Group has attracted some negative hype in the past few weeks despite its strong results.

• Analysts at JPMorgan downgraded their rating for the stock from overweight to equal weight, citing its stretched valuation. 

• The company has a trailing P/E ratio of 633 and a forward multiple of 454. Its price-to-sales ratio of 15.50 and price/book ratio of 21 are higher than the sector median. Bulls argue that the company’s growth and the potential market share justify the premium valuation. 

• The average stock target for CAVA is $113.70, slightly higher than where it was trading at on Monday. This is a sign that the stock is now fairly valued, meaning that it lacks more upside. 

• There are concerns about the weak consumer spending in the United States as evidenced by weak results by companies like Home Depot and Target. 

Summary on CAVA Group stock

CAVA Group’s management has done well in positioning the brand as the most popular Mediterranean restaurant brand in the US. It is also positioning itself as the better brand compared to Zoes Kitchen.

The company is also seen as a better alternative to Chipotle, a company that has grown its stores from 704 in 2007 to over 3,400 this year. 

However, CAVA Group faces numerous risks ahead. The most notable ones is that its valuation is stretched. It ended the last quarter with 341 stores. Using its valuation of over $14 billion, it means that investors believe that each store is worth over $41 million. 

Chipotle, with 3,500 stores and a market cap of $76 billion, is valued at $21.7 million per store. Therefore, the company will need to continue delivering strong quarterly results to justify its valuation.

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