Sweetgreen Stock: Buy, Sell or Hold?

Sweetgreen (SG 7.39%) has taken its investors on a wild ride since its IPO on November 18, 2021. The fast-casual restaurant chain went public at $28 and started trading at $52 before closing at an all-time high of $53 the next day. At the time, the market was stunned by its rapid growth. A buying frenzy in growth stocks amplified those gains.

But by March 27, 2023, Sweetgreen shares had fallen to an all-time low of $6.31. Bulls retreated as its same-store sales growth slowed, losses widened and rising interest rates compressed its valuations. Inflation also rattled the restaurant sector as investors worried about higher commodity and labor costs.

Image source: Getty Images.

However, Sweetgreen shares have risen nearly sixfold since then, trading at around $37. This turnaround was driven by steady same-store sales growth, rising margins and narrowing losses. So, is now the right time to buy, sell or own this stock?

Growing a niche in fast-casual salads

Sweetgreen sells customizable salads and hot bowls. It was founded in 2006 by three Georgetown University graduates: Nicolas Jammet, Nathaniel Ru and Jonathan Neman. He opened his first restaurant in Washington, DC the following year.

Sweetgreen raised a lot of funding as a start-up and had already expanded its footprint to 130 locations in 13 states by the time of its IPO. It also served 1.35 million customers and generated more than two-thirds of its sales from its digital channels. It owns and operates all of its own stores instead of franchising them.

Sweetgreen’s fast-casual approach to selling healthier foods, rapid expansion and strong digital sales likely reminded investors of Chipotle. That’s probably why Sweetgreen’s stock skyrocketed after its public debut.

How fast does Sweetgreen grow?

Sweetgreen experienced a slowdown in 2020 as the onset of the pandemic forced it to temporarily close its dining locations. But over the next three years, he continued to open new stores as his same-store sales continued to grow.

However, its same-store sales cooled, its average unit volume (AUV) growth steadily declined, and the proportion of digital orders gradually declined. That deceleration has fueled concerns that Sweetgreen’s business is maturing and could be caught in a cycle of growing revenue with new store openings as its same-store sales have fallen.

Data source: Sweetgreen. *Adjusted for temporary closures due to COVID-19 in 2020.

But for 2024, Sweetgreen expects its same-store sales to grow 5%-7% as it opens 24-26 new locations. Its total revenue is expected to rise 15%-16% to $670 million to $680 million. That stable outlook suggests he still has plenty of room to grow.

But can Sweetgreen ever turn a profit?

Sweetgreen is not yet profitable, but its restaurant, operating, net profit and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins have improved significantly since the IPO.

Data source: Sweetgreen.

Like Chipotle, Sweetgreen raised its menu prices to offset higher commodity and labor costs. It also reduced its corporate and support staff while automating more of its kitchens with salad-making robots.

For 2024, restaurant-wide profit margin is expected to increase to 19%-20%, with positive adjusted EBITDA of $16-19 million. This would represent an adjusted EBITDA margin of approximately 3%. Analysts expect it to reduce its net loss to $56 million.

From 2023 to 2026, analysts expect Sweetgreen’s revenue to grow at a compound annual growth rate (CAGR) of 17%. Adjusted EBITDA is also expected to triple from 2024 to 2026 as it continues to reduce its net losses. It ended the second quarter of 2024 with $245 million in cash and equivalents, and its manageable debt-to-equity ratio of 0.8 gives it room to take on more debt as it expands.

Sweetgreen has an enterprise value of $4.1 billion, making it reasonably valued (but not a bargain) at 6 times this year’s sales. Chipotle, which is growing at a comparable pace with steady earnings, also trades at 6 times this year’s sales.

Is it a good time to buy, sell or own Sweetgreen?

As long as Sweetgreen’s same-store sales continue to grow, it continues to open new stores, and its margins continue to grow, it should be a good stock to buy and hold for the next few years. However, I would gradually build my position over a few quarters, as its stock is still not cheap – and could stumble if it fails to check just one of those three boxes.