Is It Too Late to Buy Cava Stock?

Cava Group (NYSE: CAVA) is a Mediterranean-themed fast-casual restaurant chain. It's very popular with customers, with same-store sales increasing a huge 17.9% in 2023. Wall Street has seen the potential here and drove the stock price up over 80% since its mid-2023 initial public offering.

Is it already too late to get in on Cava's stock growth? That depends on how you look at it.

Cava has lots of potential growth ahead

At the end of the first quarter of 2024, Cava operated 323 restaurants. It opened 14 new locations during Q1, helping support a year-over-year increase in the store count of nearly 23%. Sales in Q1 rose a massive 30% versus the prior-year period. Cava hasn't been public for very long, but it sure has put up some very big growth.

Image source: Getty Images.

However, don't think the growth story is anywhere near over. The closest restaurant company conceptually to Cava is probably Chipotle Mexican Grill (NYSE: CMG) , which has a similar assembly line-style food preparation system. Chipotle operates around 3,500 locations around the world. But that's just Chipotle. Industry giant McDonald's (NYSE: MCD) has over 41,800 locations globally. While it isn't likely that Cava will have McDonald's-level broad appeal, it is certainly reasonable to think it can grow as large as Chipotle, which itself is still expanding.

In other words, there's reason to be excited by Cava's future prospects, but you have to weigh them against its valuation. After an 80% share-price advance in about a year or so, investors might be right to question whether now is the time to buy Cava. It's worth noting the stock has retreated from its recent high-water mark by about 15% in less than a month.

CAVA data by YCharts

Cava investors are likely to be in for a wild ride

That pullback isn't shocking given that Cava's price-to-earnings ratio (P/E) is a huge 380 today. There is a lot of good news priced into the stock right now. By comparison, Chipotle's P/E is 56 and McDonald's P/E is 22. Chipotle and McDonald's have achieved a lot more than Cava to justify their valuations.

But that's the risk/reward trade-off that investors have to make. Investing in Cava is all about the future potential of a fast-growing restaurant brand. If Cava can expand to even half the size of Chipotle, it still has a huge amount of runway ahead of it. There's a fly in the ointment, however, because very few companies grow in a straight line, and Wall Street seldom gives its unconditional support to a company. So the 15% or so stock pullback probably shouldn't be viewed as an aberration.

That will remain true even if Cava continues to expand its business at a rapid clip. A P/E ratio of 380 is worryingly high and hints that even a slight shift in investor sentiment could lead to a big drop in the share price. If you examine the stock chart of any fast-growing company closely, you'll see that price volatility is the norm. And, often, very large short-term price moves get hidden when you only focus on the long-term stock performance.

COST data by YCharts

Retail giant Costco Wholesale (NASDAQ: COST) is a great example of this, even though it operates in a different industry. It has been a tremendous growth stock, up 93,000% over the time period covered by the chart above. But look at the declines investors have had to endure over that time. Drawdowns of 30%-50% were pretty common early on.

Cava is interesting, but there could be a better opportunity to buy it

Assuming Cava can continue to expand at a solid clip, it probably isn't too late to buy the stock. But you have to go in understanding the risks. Wall Street is pricing in a lot of success right now, and that's likely to lead to volatility. If Cava executes well, it probably won't matter much in the long run. However, given the high P/E ratio, you might be better off waiting for a deep drawdown before buying if you care about valuation .

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Costco Wholesale. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy .