Cava Group (NYSE: CAVA) stock soared 116% in the first half of the year according to data provided by S&P Global Market Intelligence . It's been on a tear as it picks up in popularity and investors see it as the next great restaurant chain.
The next big thing in fast casual
Cava is the Mediterranean answer to fast-casual dining. Customers love its fresh and healthy approach to food, with tasty dishes at an affordable price. Like other fast-casual chains, it targets a resilient population that has discretionary income and can afford takeout despite inflation. Its healthier concept also resonates with affluent millennials who are into health and fitness.
Cava is still a small outfit, with only 323 stores as of the end of the 2024 first quarter. But it has entered several states already and demonstrated relevance in different regions. That's enough for investors to be confident that it can pull off a huge expansion and grow their investments several times over.
Revenue increases are still coming mostly from new stores. Cava opened 14 new stores in the first quarter, and revenue increased 30.3% year over year. Same-store sales increased only 2.3%, a huge drop from previous quarters. Management has cautioned shareholders several times that the previously higher same-store sales figures included some hype related to the company's initial public offering (IPO). That's finally drying up. It's something to keep an eye on, but there are so many other good things happening at Cava that the lower same-store sales growth didn't steal the spotlight.
Cava reported net income of $14 million in the first quarter after a $2.1 million loss last year. It also reported its first quarter of positive free cash flow of $4.7 million.
Big increases can lead to big valuations
If investors learned anything from the previous bear market, they should have learned that stock prices can't go up forever, at least if they're not based in reality. Cava looks like it could have stellar long-term potential, but its price continues to climb without enough underlying results.
At the current price, Cava stock trades at a nosebleed forward one-year P/E ratio of 188. That prices in an incredible amount of growth, and I'm just not confident Cava can sustain that right now.
Sure, Cava stock could continue to climb for some time, and if it reports strong second-quarter results, that's a likely scenario. But it looks like Cava's price is going to deflate at some point, and since you can't time the market, investors who don't do their due diligence could end up in a rough spot. If Cava doesn't report confidence-boosting second-quarter results, it could happen soon.
If you don't already own Cava stock, I would wait for a better entry point.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy .
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