3 Things to Know About Cava Stock Before You Buy

There's no doubt that Cava Group (NYSE: CAVA) was a successful initial public offering. Since its foray into the public market in June 2023, shares jumped 245% to their all-time high in December 2024. Volatility remained elevated, leading to a downward trend that now sees shares trading 38% off that peak.

Growth-oriented investors might be ready to take a big bite out of Cava today, especially while it's on the dip. Here are three things you need to know about this restaurant stock before you buy.

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Benefiting from tailwinds

Running a restaurant chain isn't necessarily an exciting endeavor. However, Cava stands out because it's exhibiting strong growth. That's because it benefits from some notable tailwinds.

The most obvious is the popularity of the fast-casual model, which was pioneered by Chipotle Mexican Grill. In this case, hungry customers appreciate the speed of service, customizable menu, focus on fresh ingredients, and open kitchen layout. Perhaps Cava bulls hope the business can mimic the Tex-Mex chain's monster success, albeit with a more health-forward, Mediterranean-inspired menu.

Cava also has a significant online presence. In fiscal 2024, 36.8% of revenue came digitally. This is where accessibility and convenience truly shine. People favor restaurants that allow them to order in the ways that they want. We see this trend, which is known as omnichannel capabilities, play out more broadly in retail. Cava's revamped loyalty program can help in this regard to drive repeat purchases.

These tailwinds explain management's growth strategy. Cava opened 58 net new stores in fiscal 2024, bringing the total to 367. The plan is to open 64 (at the midpoint) this fiscal year. The company wants to reach 1,000 locations by 2032.

While these expansion ambitions can make investors very excited, Cava's ultimate success isn't a virtual certainty. The restaurant sector might be the most competitive market out there. If it wants to increase the chances of long-term success, Cava must continue to improve the guest experience, find attractive real estate to open stores, and implement effective marketing.

Driving improving profitability

It's rare to see earlier-stage companies generating positive earnings. Cava is challenging that perspective, which is an encouraging sign. After reporting under $5 million of operating income in fiscal 2023, the business made great strides to increase that figure by more than eight-fold last fiscal year to $43 million.

It helps that each location is very lucrative. Same-store sales jumped 21.2% in fourth-quarter 2024, with a restaurant-level profit margin of 22.4%. As Cava gets larger, it should be able to benefit from a cost advantage, leveraging certain expenses over a higher revenue base.

Investors should also look at the balance sheet. It's not unusual to see a company that's in full-on growth mode like this one carry a hefty debt load. Here's where Cava bucks the trend again. As of Dec. 29, it had zero debt. Add this to improving profitability, and it reduces financial risk for shareholders.

On the dip, but not cheap

Cava shares are taking a big breather. This might be too enticing for prospective investors looking to add more growth to their portfolios during a time of heightened market and economic uncertainty.

It's critical not to ignore valuation in your analysis, though. As of this writing, the stock trades at a price-to-sales ratio of 11.4. This is much cheaper than the 19.3 peak multiple late last year. However, it provides no margin of safety. Cava's stock price today has high expectations embedded. That's a situation which warrants more caution.

Maybe as Cava starts to make progress on its growth plans and increase earnings over time, investors will have more confidence in the business and its trajectory. But right now, I view this as a high-risk stock to buy and hold.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.