Up over 200% in 2024, restaurant firm Cava Group (NYSE: CAVA) is without doubt one of the hottest shares on the complete inventory market, and for good purpose. Its income was up a surprising 35% 12 months over 12 months within the second quarter of 2024, and its web revenue soared 200% to $20 million. Furthermore, with solely 341 areas on the finish of the quarter, this little restaurant firm may have many extra years of worthwhile progress forward. No marvel traders are thrilled.
Cava is a restaurant chain specializing in Mediterranean delicacies. As an alternative of french fries, the corporate serves up pita chips. Different chains use cheddar cheese, and Cava has feta. And as an alternative of meatballs product of floor beef, this chain makes use of lamb. All of this provides Cava a differentiated nook of the restaurant market.
Cava seems to have little competitors in the case of Mediterranean meals and, consequently, a transparent path for progress. Virtually no person is aware of about an Ohio restaurant chain known as Brassica. The components on Brassica’s menu have a variety of overlap with Cava. Nonetheless, contemplating it solely has six eating places, traders might be forgiven for ignoring it.
Sadly for Cava’s shareholders, Brassica is all of the sudden within the highlight. One of many prime restaurant corporations on this planet is Chipotle Mexican Grill (NYSE: CMG), and it simply invested on this small Cava rival. This is what it means and doesn’t suggest for traders.
What’s Chipotle doing?
In 2022, Chipotle launched a venture capital fund. The fund had a $50 million pool for investing in start-up companies. Since launching, the corporate has made a number of investments and doubled its funding pool to $100 million in February.
In keeping with the press releases, Chipotle’s fund seeks to spend money on “provide chain, agriculture, restaurant innovation, automation, and different areas that assist Chipotle’s mission.” And that is precisely what the corporate has carried out. For instance, it beforehand invested in Native Line, a start-up serving to supply meals domestically. It additionally invested in Hyphen, a start-up bringing robotics and automation to industrial kitchens.
Chipotle’s funding in Brassica would not appear to suit inside its specific goals.
Brassica is not the primary restaurant chain that Chipotle has ever invested in. In 2013, the corporate invested in a pizza chain known as Pizzeria Locale (now closed down). It is tried constructing a number of different restaurant ideas by way of the years. Nonetheless, that is the primary funding in a restaurant chain from its enterprise capital fund.
Relating to issues similar to restaurant automation or provide chain, it is easy to see how these investments may instantly profit Chipotle Mexican Grill. Maybe by funding a robotics firm, for instance, there can be a food-prep robotic breakthrough. Finally, Chipotle may develop into a buyer and use robots in its kitchens (which, by the way, it’s).
Nonetheless, concerning its funding in a restaurant firm similar to Brassica by way of its enterprise fund, the profit to Chipotle is much less clear.
What this does and doesn’t suggest
On the floor, it seems to be like Chipotle is funding a competitor within the Mediterranean meals area, which would appear unhealthy for Cava. However not so quick. Buyers could be remiss to not keep in mind a lesson from historical past.
Through the years, there have been numerous headlines explaining how chains similar to Qdoba, Taco Bell, Moe’s Southwest Grill, and others would steal gross sales away from Chipotle. However competitors did not stop Chipotle from rising its gross sales 12 months in and 12 months out. Due to this fact, even when extra competitors arises for Mediterranean delicacies, this may not essentially influence Cava.
Furthermore, it is doable that Chipotle genuinely needs to see Brassica succeed due to its want to serve natural meals that is sourced domestically — in keeping with Chipotle’s mission. Some assume that Chipotle needs to ultimately take over Brassica and develop it right into a formidable Cava competitor. However possibly it has no such intention.
No matter what occurs with Chipotle and Brassica, I feel this story is a reminder that Cava might want to defend itself in opposition to upstart rivals because it grows. Success and dimension invite competitors.
In that regard, Cava is in an amazing place to defend itself. Not solely is recognition hovering, as evidenced by its Q2 same-store-sales progress of 14%, but it surely additionally has practically $350 million in money and money equivalents and nil debt. That is a superb place to be.
Nonetheless, with Cava inventory buying and selling at its highest valuation ever at practically 19 times sales — one of many priciest restaurant shares on the market — traders ought to ask how huge the dangers are for this firm and whether or not the potential reward is excessive sufficient to justify the danger. In spite of everything, at this valuation, a variety of good issues are already priced in for many who purchase at this time.
Don’t miss this second likelihood at a probably profitable alternative
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On uncommon events, our professional group of analysts points a “Double Down” stock advice for corporations that they suppose are about to pop. In the event you’re nervous you’ve already missed your likelihood to take a position, now could be the perfect time to purchase earlier than it’s too late. And the numbers converse for themselves:
- Amazon: if you happen to invested $1,000 once we doubled down in 2010, you’d have $21,285!*
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Proper now, we’re issuing “Double Down” alerts for 3 unimaginable corporations, and there is probably not one other likelihood like this anytime quickly.
*Inventory Advisor returns as of October 14, 2024
Jon Quast 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 December 2024 $54 places 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 mirror these of Nasdaq, Inc.
