Is Cava a millionaire stock?

Can Cava (COFFEE -0.50%) be a stock millionaire? Well, that obviously depends on how much money a person is willing to invest.

Cava is trading at around $117 per share at the time of writing. Let’s say an investor buys 7,700 shares. In this scenario, those shares will cost $900,000. But if it hits $130 a share (a paltry 11% gain), the stake would be worth $1 million.

Most investors don’t have $900,000 lying around — even a $10,000 investment is significant for many. For $10,000, one could buy about 85 shares of Cava. But Cava shares would have to increase 100x in value to be a millionaire in this scenario.

In asking if Cava stock is worth millionaires, what we’re really asking is how much can the stock go up in the long run? My answer is that the stock of cava will remain far from hundred-bag territory, as I will explain.

What’s going on with Cava?

Cava is a small fast-casual Mediterranean restaurant chain with 341 locations, offering different items on its menu that include lamb, falafel and feta cheese. Differentiation can help it stand out, and the company really seems to be grabbing the attention of consumers.

Same store sales (or same restaurant sales in this case) measures sales at Cava locations that have been open for some time. The company opened 18 new locations in the second quarter of 2024, which obviously boosts total sales. But measuring same-store sales can show whether the brand is growing in popularity where locations have been open for at least a year.

For Cava, its second-quarter same-store sales rose more than 14%. From perspective, any positive number is seen as a good thing. Double digit growth is seen as a great thing.

Restaurant stocks typically struggle with profitability, but Cava makes it look easy. At the restaurant level, the profit margin in Q2 was almost 27%. Even after accounting for other corporate expenses, the company still had a net profit margin of 7% in the first half of 2024, which is quite strong.

With growth and profits, Cava is a great restaurant business.

So what kind of returns can Cava stock bring?

As of this writing, Cava has a market cap of over $13 billion. A 100x increase in value would push it into the trillion-dollar club, which is unreasonable for a restaurant concept, however promising. For perspective, McDonald’s is the most valuable restaurant today, with a market capitalization of about $200 billion. I can’t see Cava being worth more than five McDonald’s in my lifetime.

What kind of long-term return can Cava stock provide in a best-case scenario? Well, I’ll keep things simple by using the company’s current financials and management’s long-term goals.

When it went public in 2023, Cava management said it could have 1,000 locations by 2032. That’s about three times as many as it has today. Let’s add an extra layer of optimism to that and say it could open three times that number by 2044 — In other words, 3,000 locations 20 years from now.

As of this writing, the average Cava location has annual sales volume of $2.7 million. Let’s say this doubles over the next 20 years to $6 million in average annual sales volume. If the company made 3,000 locations at that volume, it would have annual revenues of $18 billion.

To be clear, I’m projecting some aggressively optimistic growth assumptions here. But if Cava traded at 5 times this revenue assumption in 2044 (a generous valuation), it would have a market cap of $90 billion. From today’s valuation, that’s about a 10% annualized gain for the stock.

What does this mean for investors today?

I’ve used some very optimistic numbers here for Cava over the next 20 years — optimistic numbers that they may not achieve. But hitting those numbers might yield only modest annual returns — even becoming a 10-bagger seems unlikely, in my opinion.

Therefore, I would say that cava stock is not a potential millionaire.

Cava is clearly a special restaurant company. It’s rare for investors to find something that stands out from the crowd, has a viable growth path, and has a management team capable of generating strong returns. At least it belongs on a watch list.

Given that it’s trading at an exuberant valuation of 16 times its sales, I’d say investors shouldn’t expect million-dollar profits at today’s price. But patient investors can still see positive long-term returns as long as the business continues on its current trajectory.