Tariff talks have been sinking the markets over the previous few weeks, and the S&P 500 and Nasdaq Composite have been in and out of correction territory. The excellent news for traders is that many shares which might be too costly have been coming down in value, giving them the chance to purchase on the dip at an affordable valuation.
Cava Group (NYSE: CAVA) inventory is a superb instance. The corporate has reported spectacular metrics since going public in 2023, and traders have responded by grabbing the inventory at seemingly any value, pushing it as much as astronomical valuations.
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Regardless of phenomenal efficiency, the inventory has tumbled 23% 12 months thus far. Beneath, I am going to take a look at what is going on on and whether or not Cava inventory has lastly bottomed out.
Why traders are smitten by Cava inventory
Cava operates a sequence of Mediterranean-themed fast-casual eating places with an analogous mannequin to Chipotle Mexican Grill. It makes use of a restricted choice of recent, premium elements to customise a big menu of dishes at a value level above quick meals however decrease than sit-down eating. The eating places are geared towards prosperous clients who need and will pay for more healthy fare.
Up to now, it seems like clients are loving it, and it is rising at a quick tempo. Income elevated 33% in 2024, pushed by a 13% improve in same-store gross sales. That is a really excessive same-store gross sales development price, in contrast with trade requirements, and implies that Cava has a stable idea that may entice enterprise and generate loyalty.
The corporate nonetheless has a small variety of shops and is increasing at a gentle tempo. It opened 58 shops in 2024 and plans to open about 64 in 2025.
Contribution revenue — which measures how worthwhile Cava is on the particular person restaurant degree — is rising at a wholesome tempo, up 34% 12 months over 12 months in 2024, and contribution margin improved by 0.2 proportion factors to 25%. That is driving bottom-line development, and web revenue skyrocketed from $13.3 million to $130.3 million in 2024.
Extra development forward
Cava has solely 367 shops, as of the tip of 2024, however envisions reaching 1,000 over the subsequent seven years. That means a serious acceleration. Nonetheless, even when it does not hit 1,000 shops by 2032, it ought to be capable to sustain sturdy development via retailer openings and rising same-store gross sales.
Administration is guiding for a slowdown in same-store gross sales this 12 months to 7%, and that steering is a part of the explanation the inventory started to sink earlier this 12 months. Cava identified that it’s not planning to extend costs additional this 12 months, which accounts for a part of the slowdown, since value will increase are included in same-store gross sales development.
Be cautious when an excessive amount of of same-store gross sales development is attributed to cost will increase because it means the expansion is not coming from extra visitors or quantity. Administration is anticipating many of the same-store gross sales development in 2025 to return from visitors, which is a constructive signal.
Is Cava inventory too costly?
The market sees an enormous future forward for Cava. The corporate has a stable idea and robust execution and is so small that there is a variety of alternative.
You may see simply how enthusiastic the market is from Cava inventory’s excessive valuation. Even down this 12 months, it trades at a price-to-earnings ratio (P/E) of 78, which is not a cut price. Nonetheless, it won’t get any decrease. Traders are sensing alternative within the decrease inventory value, and Cava inventory is already on the upswing.
There’s nonetheless a variety of purpose for warning. As a result of Cava is so small, there’s not a variety of historical past to depend on when making your investing choice. It may be negatively impacted by the tariff scenario or different financial adjustments that may very well be coming.
Nonetheless, given Cava’s nice begin, if you should purchase and maintain its inventory for at the very least 5 years, you possible shall be well-rewarded should you purchase as we speak. One technique to make use of is dollar-cost averaging, the place you purchase in at completely different value factors to attempt to profit from dips.
Do you have to make investments $1,000 in Cava Group proper now?
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Jennifer Saibil has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Chipotle Mexican Grill. The Motley Idiot recommends Cava Group and recommends the next choices: brief March 2025 $58 calls on Chipotle Mexican Grill. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.
