It's been an encouraging year for investors. As of Aug. 13, the S&P 500 has climbed 14% and is trading just 4% off its peak price. The market might still believe that a recession can be avoided.
However, some businesses have benefited more than others from the bullish tone. Fast-casual salad purveyor Sweetgreen (NYSE: SG) is in a league of its own. Its shares have skyrocketed 205% this year, a gain that would've tripled your money in less than eight months.
Is it too late to buy this booming restaurant stock ?
Salads for everyone
Sweetgreen shares have done remarkably well this year due to impressive growth. When the company reported its Q4 2023, Q1 2024, and Q2 2024 financial results, the stock immediately jumped more than 30% on each occasion. Talk about exceeding expectations.
In the latest quarter (ended June 30), Sweetgreen saw its revenue rise 21%, compared to the same period a year ago. This was partly bolstered by strong same-store sales growth of 9%.
The other piece of the puzzle for Sweetgreen is its rapid store-expansion strategy. Through the first 26 weeks this year, the company opened 10 net new locations, bringing its total to 225. The goal is to open 25 new stores for the full year.
Wall Street analysts predict that revenue will increase 16% in 2024 and 2025. Should this outlook become true, it would mark a notable slowdown from prior years.
Unhealthy traits
The market loves a good growth story, and Sweetgreen is one of them. The stock's performance tells me that investors see the huge top-line gains continuing for the foreseeable future.
However, investors must also be aware of the negative traits this business possesses. I can come up with two key attributes that are cause for concern.
Sweetgreen remains unprofitable. Its Q2 operating loss of $16 million was almost half that of the prior-year period. But it tells me that the company still has lots of work to do to get into the black.
As long as revenue continues to rise, coupled with some operating leverage, Sweetgreen will be heading in the right direction. Inflationary pressures for things like food and labor should draw the attention of investors, though.
When looking at the corporate landscape, it's hard to identify a more competitive industry than restaurants. There are minimal barriers to entry that prevent new restaurants from popping up. And from a consumer perspective, there are no switching costs.
Chipotle Mexican Grill and Starbucks have developed economic moats in the industry, which helps support their competitive positions against rivals. They have strong brands and scale advantages.
However, I'm doubtful that Sweetgreen possesses a moat at this point. If it can get to a much bigger store base, it might fall into this category.
High expectations
As of this writing, Sweetgreen shares trade 35% off their all-time high, a milestone that was achieved the day right after the business hit the public markets in November 2021. Investors might view this as a buy-the-dip opportunity.
I'm not convinced. This remains an expensive stock, in my opinion. The current price-to-sales ratio of 6 represents a sizable 42% premium to the historical average.
Besides selling at a sky-high valuation that fully prices in the extreme levels of optimism, Sweetgreen likely doesn't have any sustainable competitive advantages. Couple this with the company's lack of positive earnings, and I'll gladly pass on buying the stock right now.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Sweetgreen and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy .
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