Should you buy or is it too late?

The S&P 500 had a solid year, producing a total return of 19% (as of August 28). This momentum is based on huge growth in 2023.

But there is one booming stock that has significantly outperformed the broader index. It has soared 175% so far in 2024. As if that gain wasn’t remarkable enough, this company’s stock has even outperformed the power of AI. Nvidia this year, a deal investors just can’t get enough of.

But is it too late to buy this monster? restaurant stock?

The growth potential of Cava

Investors might be surprised to learn that the company is making such impressive earnings Cava (NYSE: CAVA)the operator of Mediterranean-inspired fast-casual restaurants throughout the country. The company won over excited investors with its strong financial performance and growth prospects.

During the second fiscal quarter of 2024 (ended July 14), Cava reported year-over-year revenue growth of 35.2%. This was driven by robust same-store sales growth of 14.4%, a clear indication that foot traffic and prices remain solid despite macroeconomic uncertainty.

However, the key part of Cava’s story is the rapid expansion of its store base. After opening 18 new locations in Q2, there are now a total of 341. Cava says the restaurant averages $2.7 million in annual sales volume, with outstanding restaurant-wide earnings before interest, taxes , depreciation and amortization (EBITDA) the edge of 26.5% (this figure excludes corporate expenses). These economic units are not too far from the industry leader Chipotle Mexican Grill.

The management team has its eyes on a big target. By 2032, the goal is to have 1,000 stores open, which translates to about three times the size of the current footprint. Certainly, the revenue will be substantially higher if everything goes according to plan.

Cava generated operating income of $16.1 million last quarter, which was nearly triple the total in Q2 2023. Profitability was helped by better leverage of certain expenses. As the business grows, investors hope that the bottom line will grow at a faster rate than revenue.

Leaving investors hungry for more

After seeing a stock nearly triple in about eight months, I don’t think anyone would disagree with the statement that the market is incredibly excited about Cava’s prospects. The momentum is hard to ignore.

However, savvy investors will focus on valuation. Cava hits nosebleed territory. If you wanted to buy the shares, you would have to pay a the forward price-earnings ratio of 270. That’s nearly 12 times the S&P 500’s valuation and more than five times Chipotle’s.

The story continues

At the current valuation, I don’t think Cava is a smart buying opportunity. In fact, it may be too late for investors who missed this year’s rally. The price is so much optimism that it leaves no margin of safety. In fact, there are additional risks if the market loses interest or if Cava’s growth slows down.

I wouldn’t be surprised if that happened. The company’s recent financials are impressive, but I would say that Cava has yet to develop sustainable competitive advantages. Chipotle, whose success in recent years has been truly remarkable, has a strong brand known for quality and value. And its size likely results in cost advantages when sourcing key food and paper products or choosing real estate.

At its current scale, Cava most likely does not possess these favorable characteristics, which are essential for lasting success in the highly competitive restaurant sector. Perhaps this will change in the next few years as it expands its store base and potentially increases earnings.

Even if my assessment of Cava’s quality is incorrect, that doesn’t take away from the fact that the stock’s valuation is sky high. This is a business that investors should keep on their watch list for now.

Should you invest $1,000 in Cava Group right now?

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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 Nvidia. The Motley Fool recommends Cava Group and recommends the following options: short September 2024 $52 put on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

1 monster stocked 175% in 2024: should you buy or is it too late? was originally published by The Motley Fool