Is Cava beating Chipotle at its own game? 3 things investors should know before buying any of these stocks

When Cava (COFFEE -6.39%) went public in June 2023, it was hailed by some as new Chipotle Mexican Grill (CMG -0.25%). It offers a similar model of fast-casual restaurants offering healthy and fresh food, with Mediterranean-style dishes offering a different twist on the concept.

Cava is meeting investors’ expectations, and just over a year into being a public company, it’s headed in the right direction. Should Chipotle Investors Take a Look? Here are three things to think about before opening a position in either stock.

1. Cava is growing much faster — for now

As a young company, Cava is growing at a fast pace. It’s taking a page out of the Chipotle playbook, but since Chipotle is much more mature, the Mexican food chain’s growth isn’t as big.

Data sources: Cava and Chipotle quarterly filings. EPS = earnings per share. YoY = year over year.

Cava’s overall sales growth rate was nearly double Chipotle’s, but comparable sales growth was only slightly higher. Chipotle reliably delivers consistent double-digit percentage growth, even if it’s at a slower rate than a new competitor, and its comparable sales growth is remarkable. So is its profitability.

2. Cava’s opportunity may be more limited

You might think Cava has a longer runway because it’s young and only has 341 stores. However, its management team sees the opportunity to expand the chain to a total of around 1,000 stores over the next eight years. Chipotle, by contrast, has its model down and a proven track record of popularity and plans to double its North American store count to 7,000. Cava’s opportunity percentage wise may be higher, but its overall opportunity still seems smaller in comparison.

In the second quarter, Cava opened 18 stores and plans to open at least 54 for the full year. Chipotle opened 52 stores this quarter alone and plans about 300 for the year.

Chipotle is also expanding internationally. Cava may pursue that strategy at some point if all goes well, but overseas markets aren’t even on the radar yet.

2. Cava stock may not be worth the price

The problem with hot stocks is that they often become hot before the average investor hears about them. Initial public offering (IPO) stocks these days often start at ridiculous valuations, making them non-starters for a disciplined retail investor. Even when it continues to rise after that initial rise, it is usually a prelude to an eventual fall; these stocks simply cannot sustain their unreasonable valuations for too long. In that context, consider Cava, which is up more than 200% since its IPO just over a year ago.

It’s clearly a Cava problem, but Chipotle stock isn’t cheap either, though it has delivered phenomenal gains for investors who have held out. Chipotle shares have been down since June and have wobbled a bit since news broke a few weeks ago that superstar CEO Brian Niccol was letting him take over. Starbucks.

Data on CAVA PE ratio (forward 1y) by YCharts.

At the current price, Cava stock just doesn’t look compelling. For all its performance and great potential, I don’t think it can sustain this kind of rating for long. Is there any chance he can keep this streak going and keep this rating? There is — but the stock price has absolutely no wiggle room for any mistakes. The cava stock has surged after excellent second-quarter results and will fall if there is any weakness in the business. That’s how it usually works with hyped-up stocks.

Risk-tolerant investors may be more interested in Cava stock, but most investors should see this as an opportunity to buy the reliable Chitpotle stock, which is beating the declining market.