When it comes to hot stocks, Cava Group (CAVA 0.40%) is arguably among the hottest. Shares surged more than 300% over the past 12 months.
Given the current lofty price of Cava stock, it's almost hard to believe it was at a 52-week low of $29.05 last October. And Cava's debut as a public company, in June 2023, was at $22 per share.
Can the stock's massive run up continue, or is it too late to buy shares? The stock has pulled back from its 52-week high of $131.82 reached in September, so this could indicate a potential buy opportunity. To know if now is a good time to pick up Cava shares, let's dig into this hot company.
Cava's spectacular stock performance is understandable when you look at its sales. In its fiscal second quarter, ended July 14, revenue rose an impressive 35% year over year to $231.4 million.
Q2 was the latest in Cava's streak of rapidly rising revenue during its short life as a public company. Its performance in the first half of fiscal 2024 suggests the company could possibly reach $1 billion in full-year sales.
Data source: Cava Group. YOY = year-over-year.
Cava's trend of expanding revenue is due to a combination of opening new restaurants, and surging sales at existing locations. In Q2, Cava opened 18 restaurants, bringing its total to 341, while sales in existing locations grew 14% year over year.
Sales growth was only the beginning of excellent Q2 financials. Cava's net income in the quarter shot up to $19.7 million from $6.5 million in the prior year. The company also generated Q2 free cash flow (FCF) of $22.7 million, a dramatic turnaround from its negative FCF of $12 million in 2023.
The restaurant chain exited Q2 with an excellent balance sheet as well. Total assets stood at $1 billion, while total liabilities were $443 million.
Cava CEO Brett Schulman plans to foster Cava's sales growth by focusing on a few strategic priorities. One of these is to continue opening new restaurants.
When Cava exited its 2023 fiscal year, ended Dec. 31, it forecast opening between 48 to 52 new locations in 2024. Thanks to its strong sales, in Q2, the company raised this guidance to between 54 to 57 new restaurants.
Cava is funding new restaurant openings through its cash from operations. This is a positive sign, since the approach avoids accumulating debt to pay for expansion.
Another of its strategies is the rollout of a new nationwide loyalty program, facilitated through its mobile app. The company generates a substantial 36% of its income from digital sales, so a new rewards program could be a key factor in boosting revenue.
Cava is also employing technology to streamline operations and manage costs. For instance, it's testing the use of artificial intelligence to anticipate when staff needs to cook more food.
The company's business strategy echoes that of rival Chipotle, whose success translated into a steadily rising stock price over the past several years. This bodes well for Cava's long-term growth plans.
Given all the positives about Cava, it's no wonder the stock has skyrocketed since its IPO. But does its spectacular business performance mean it's time to invest in the restaurant chain? Currently, no, now is not a good time to buy Cava shares.
The reason is its stock's price-to-earnings (P/E) ratio, a commonly used metric for assessing valuation. Right now, Cava's P/E multiple is incredibly high when compared to other players in the fast-casual and quick-serve restaurant arena, such as Chipotle, Shake Shack, and veteran McDonald's.
Cava's P/E ratio has only gone up over recent weeks, so its stock is looking particularly overpriced these days. This is validated by the share price target in the projections of Wall Street analysts.
While Wall Street's consensus is an overweight rating for Cava stock, its median share price target is $117.50, which is below Cava's stock price at the time of this writing.
Given these indicators that Cava is overpriced, it's best to wait, and monitor the stock for a price drop before deciding to buy shares.