1 Magnificent Stock Up 205% in 2024: Is It Too Late to Buy?

It was an encouraging year for investors. Starting from August 13, the S&P 500 it’s up 14% and is trading just 4% off its peak price. The market may still believe that a recession can be avoided.

However, some companies benefited more than others from the upbeat tone. Fast delivery of salads Sweetgreen (SG 1.63%) it’s in a league of its own. Its shares have soared 205% this year, a gain that would have tripled your money in less than eight months.

It’s too late to buy this boom restaurant stock?

Salads for everyone

Sweetgreen shares have done remarkably well this year thanks to impressive growth. When the company reported its Q4 2023, Q1 2024 and Q2 2024 financial results, the stock immediately rose more than 30% each time. Talk about exceeding expectations.

In the most recent quarter (ended June 30), Sweetgreen saw its revenue grow 21% compared to the same period a year ago. This was partly supported by strong same-store sales growth of 9%.

The other piece of the puzzle for Sweetgreen is its rapid store expansion strategy. In the first 26 weeks of this year, the company opened 10 net new locations, bringing the total to 225. The goal is to open 25 new stores for the full year.

Wall Street analysts predict that revenue will grow 16% in 2024 and 2025. If that outlook turns out to be true, it would mark a notable slowdown from previous 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 that this business possesses. I can come up with two key attributes that are cause for concern.

Sweetgreen remains unprofitable. The second-quarter operating loss of $16 million was nearly half of the year-ago period. But it tells me the company still has a long way to go to break even.

As long as revenue continues to grow, along with some operating leverage, Sweetgreen will be headed in the right direction. Inflationary pressures on things like food and labor should still get investors’ attention.

When looking at the corporate landscape, it’s hard to identify a more competitive industry than the restaurant industry. There are minimal barriers to entry that prevent new restaurants from emerging. And from the consumer’s perspective, there are no switching costs.

Chipotle Mexican Grill and Starbucks they developed economic ditches in the industry, which helps support their competitive positions against rivals. They have strong brands and scale advantages.

However, I doubt Sweetgreen has a moat at this point. If it can reach a much larger store base, it could fall into that category.

High expectations

At the time of writing, Sweetgreen shares are trading 35% off their all-time high, a milestone that was reached the day after the business hit the public markets in November 2021. Investors could see this as an opportunity to purchase.

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 skyrocketing valuation that fully prices at extreme levels of optimism, Sweetgreen probably has no sustainable competitive advantages. Combine that with the company’s lack of positive earnings and I’d happily pass on buying the stock right now.