Can Cava (NYSE: CAVA) be a millionaire-maker inventory? Effectively, that clearly depends upon how a lot cash an individual is prepared to speculate.
Cava trades at about $117 per share, as of this writing. For example that an investor buys 7,700 shares. On this situation, these shares will value a whopping $900,000. But when it goes as much as $130 per share (a meager 11% achieve), the stake can be price $1 million.
Most traders haven’t got $900,000 mendacity round — even a $10,000 funding is critical for a lot of. For $10,000, one might buy about 85 shares of Cava. However Cava inventory would wish to go up a whopping 100 occasions in worth for it to be a millionaire-maker on this situation.
In asking whether or not Cava inventory is a millionaire-maker, what we’re actually asking is by how a lot can shares rise over the long run? My reply is that Cava inventory will keep distant from hundred-bagger territory, as I am going to clarify.
What is going on on with Cava?
Cava is a small Mediterranean fast-casual restaurant chain of 341 areas, providing completely different objects on its menu that embrace lamb, falafel, and feta cheese. Differentiation may help it stand out, and the corporate certainly seems to getting shoppers’ consideration.
Same-store sales (or identical restaurant gross sales on this case) measure gross sales at Cava areas which were open for some time. The corporate opened 18 new areas within the second quarter of 2024, which clearly boosts total gross sales. However measuring same-store gross sales can present whether or not the model is rising in recognition the place areas have been open for at the very least a yr.
For Cava, its second-quarter same-store gross sales have been up greater than 14%. For perspective, actually any constructive quantity is seen as a very good factor. Double-digit progress is seen as a nice factor.
Restaurant stocks normally battle with profitability, however Cava is making it look straightforward. On the restaurant stage, its Q2 revenue margin was nearly 27%. Even after accounting for different company bills, the corporate nonetheless had a net profit margin of seven% within the first half of 2024, which is kind of sturdy.
With progress and income, Cava is a superb restaurant enterprise.
So what sort of returns can Cava inventory deliver?
As of this writing, Cava has a market capitalization of over $13 billion. Growing 100 occasions in worth would push it into the trillion-dollar club, which is unreasonable for a restaurant idea, irrespective of how promising it’s. For perspective, McDonald’s is probably the most useful restaurant right this moment, with a market cap of about $200 billion. I am unable to see Cava being price greater than 5 McDonald’s in my lifetime.
What sort of long-term returns can Cava inventory present in a best-case situation? Effectively, I am going to maintain issues easy, utilizing the corporate’s present financials and administration’s long-term targets.
When it went public in 2023, Cava’s administration mentioned it might have 1,000 areas by 2032. That is roughly 3 times as many because it has right this moment. Let’s add an additional layer of optimism to this and say it might open 3 times this quantity by 2044 — In different phrases, 3,000 areas 20 years from now.
As of this writing, the typical Cava location has $2.7 million in annual gross sales quantity. Let’s assume this greater than doubles over the subsequent 20 years to $6 million in common annual gross sales quantity. If the corporate achieved 3,000 areas at this quantity, it could have $18 billion in annual income.
To be clear, I am projecting some aggressively optimistic progress assumptions right here. But when Cava traded at 5 times this revenue assumption in 2044 (a beneficiant valuation), it could have a market cap of $90 billion. From right this moment’s valuation, that is a few 10% annual achieve for the inventory.
What does this imply for traders right this moment?
I’ve used some actually optimistic numbers right here for Cava over the subsequent 20 years — optimistic numbers it may not obtain. However reaching these numbers nonetheless may solely yield modest annual returns — even turning into a 10-bagger seems unlikely, for my part.
Subsequently, I might say that Cava inventory is not a possible millionaire-maker.
Cava is clearly a particular restaurant firm. It is uncommon that traders can discover one thing that stands out from the gang, has a viable path for progress, and sports activities a administration group that’s able to producing sturdy income. It belongs on a watch record on the very least.
On condition that it trades at an exuberant valuation of 16 occasions its gross sales, I would say that traders should not count on millionaire-maker returns from right this moment’s value. However affected person traders can nonetheless see constructive long-term returns so long as the enterprise continues on its present trajectory.
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Jon Quast has no place in any of the shares talked about. The Motley Idiot recommends Cava Group. 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 mirror these of Nasdaq, Inc.
