Is Cava Stock a Buy Today? Wall Street Has Its Doubts

Cava Group (NYSE: CAVA) has been a hot stock since its initial public offering (IPO) last year. It burst onto the scene with a fresh restaurant concept that's been catching on across the country, and investors are hoping it becomes the next big restaurant chain.

While investors can't seem to get enough of Cava stock, Wall Street has taken a more cautious view of the company. Is it still a buy?

Is Cava the future of fast-casual dining?

Cava is one of several hot stocks in the fast-casual restaurant category. Pioneered by Chipotle Mexican Grill , fast-casual chains offer a step-up in ambiance and quality from fast-food. Other popular names include Sweetgreen and Shake Shack .

As an up-and-coming player in the space, Cava sets itself apart with a Mediterranean-focused menu, and it's growing quickly. The company isn't only reporting strong revenue growth but rising profitability as well. In its fiscal 2024 first quarter, 14 new restaurant openings helped push the company's top line 30% higher to $256.3 million. It also reversed its prior-year loss of $1.30 per share with $0.12 per share in earnings during the quarter.

The chain is already operating in 25 states plus Washington D.C. with 323 total stores, and management plans to keep expanding throughout the country. They say the concept is easily transferable to all markets, and investors are excited about Cava's growth runway. It only has about a tenth of Chipotle's restaurant count at this point.

What Wall Street thinks

Cava stock has pulled back in July, partially due to analysts reporting lower restaurant spending in the second quarter. With shares trading at $81.48 as of this writing, the median analyst target price for the next 12 to 18 months is only 10% higher at $90. And only half of the 16 analysts covering the stock recommend it as a buy.

Part of that could be due to its high valuation. It trades at a forward price-to-earnings (P/E) ratio of 181 and a price-to-sales (P/S) ratio of 11, a significant premium over other, faster-growing stocks.

But it's more than that. Cava is competing against much larger brands in the restaurant space, and its staying power is largely unknown. The company has only been profitable for a few quarters, and its same-store sales increased only 2.3% year over year last quarter. Even worse, those gains came entirely from increased prices as traffic fell 1.2%.

So, how important is it to pay attention to what Wall Street analysts are saying? Investors should use treat their analysis as yet another data point. The better informed you are before you buy a stock, the more likely you are to make a good decision. If you're bullish but see Wall Street taking a different stance, it's worth exploring their reasons for concern.

Most public companies make their quarterly earnings call recordings or transcripts available to investors. It can be enlightening to hear the kinds of topics and questions analysts bring up to the management team.

What the market says

The market doesn't seem to be as concerned as some of the analysts covering the stock. Cava is still up 90% year to date despite its recent decline.

The next few quarters will tell investors a lot about Cava's ability to scale profitably and revitalize same-store sales. If the chain can expand its margins as it widens its footprint, especially with inflation, that will boost investor confidence. They'd also be happy to see stronger traffic contributing to accelerating same-store sales growth.

Cava has hit some speed bumps recently, but its long-term outlook is promising. It could be a great stock at the right price, but its current valuation is too hard to stomach.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and Sweetgreen. The Motley Fool has a disclosure policy .