Missed Out on Chipotle Mexican Grill? Buy Cava Instead

Chipotle Mexican Grill (NYSE: CMG) has been a massive success as a business and as an investment. Shares of the fast-casual restaurant chain have gained over 5,000% since the stock's initial public offering!

Newcomer Cava Group (NYSE: CAVA) , which serves up Mediterranean fare, has only been public since mid-2023 and its stock price has advanced around 80% or so, but that's still nowhere near as much as Chipotle's has gained over time.

There's an opportunity here with the name on the block, but go in understanding the risks. Let's dive in.

Chipotle and Cava have one big similarity

When you look at one of Chipotle's 3,500 restaurant locations, you'll see what was once a fairly unique concept. There is an assembly line where an employee helps customers build a meal from freshly made ingredients.

Many of those ingredients, meanwhile, are being prepared right behind the assembly line in a visible kitchen, so customers can actually see the food that's being used. Not only does this approach allow for highly customized meals, but it increases the feeling that the food is high quality.

Image source: Getty Images.

This is pretty much what you'll find at one of Cava's 320 or so locations, as well. The big difference is the type of food being created. Chipotle Mexican Grill, as its name implies, uses a Mexican theme. Cava's theme is Mediterranean. Both have been very popular with customers. Chipotle's growth over time is all the proof you need of its success with eaters, while Cava's same-store sales growth in 2023 was a huge 17.9%.

That said, nearly 18% same-store sales growth is not a sustainable figure. The first quarter saw same-store sales growth drop to 2.3%, but that's not a bad figure. In fact, if Cava can sustain that level of same-store sales growth while it continues to expand its footprint, there remains a huge opportunity. Indeed, new store openings over the past year helped to push overall sales at Cava up 30% year over year in the first quarter.

Chipotle's success suggests there's more room for Cava

But the comparison to Chipotle is what's really interesting here. Remember, Chipotle has 3,500 locations versus just 320 or so for Cava. That means Cava could, realistically, grow its business by 10 times and not fully saturate the market. Chipotle is still expanding, too, so there's clearly more room ahead even for this very large business. And all Cava needs to do to rapidly increase its top line is to keep its core business running well, which is what same-store sales tell you, while opening new locations. It opened 14 in the first quarter.

So if you feel like you've missed out on Chipotle, Cava is probably a good stock for you to be looking at now. But you need to go in with your eyes open.

First off, execution will be vital to Cava's success. This is why investors need to keep an eye on both the top line and same-store sales. Fast-growing young restaurant concepts often get pushed by Wall Street to grow as quickly as possible and, eventually, that can lead to management getting distracted. If same-store sales were to weaken materially, investors will want to tread with great caution.

Second, the Chipotle comparison isn't lost on Wall Street when it comes to Cava. Indeed, Cava's price-to-earnings ratio is a huge 380. To be fair, Chipotle's P/E is pretty high at around 55 times, but clearly investors are pricing in a lot of good news into Cava's stock. With expectations that high, a shortfall of any kind, even a modest one, could lead to a quick stock price decline. If you buy Cava you'll probably need some fortitude to stick around.

Cava is a high-risk/high-reward investment

Investors are buying Cava because they think it has a huge growth opportunity ahead of it. If you compare it to Chipotle, given the similarity of the concepts, that looks like a reasonable expectation. The key from here is going to be Cava's ability to deliver from a nuts-and-bolts perspective, which is not going to be easy.

But if you can stomach the lofty valuation and are willing to keep close tabs on the interplay between sales and same-store sales, Cava seems like a good choice for growth investors that feel like they've missed out on Chipotle.

Reuben Gregg Brewer 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. The Motley Fool has a disclosure policy .