Spotlight: Should Sweetgreen Be 50% Higher?
CAVA debuted on the New York Stock Exchange on June 16, selling 14.4 million shares and raising a cash hoard of $318 million at a valuation just under $2.5 billion.
Eagle-eyed investors were stunned to see the share price soar by as much as 117%, before ultimately closing at $43.78 per share, slightly above its $42 open. This was a scintillating debut given that the Cava Group had slated an IPO price of $22 per share.
What makes Cava so special?
Key Points
- Sweetgreen is trading at a lower price-to-sales ratio than Cava, thought it has a large addressable market.
- SG does not have a significant presence in many major cities but has a long runway of growth ahead.
- Its year-over-year revenue growth has slowed in recent quarters, but it still grew by 21.9% in the most recent quarter.
The Chipotle Factor
It’s no secret that Chipotle Mexican Grill has been a fabulous commercial success as consumers migrated from fast-food options that were widely perceived as less healthy to higher quality ingredients in burritos and quesadillas. That secular trend is what the Cava Group capitalized upon by establishing a Mediterranean fast-casual choice for discerning consumers.
Twelve years after its founding, Cava acquired Zoe Kitchen and converted its locations to Cava restaurants, which added to its location count that totaled north of 260 when IPO filings were declared.
It appears that each location on average brings in close to $2 million with sales rising to $564 million at the end of 2022.
A hugely successful debut generally means all the early investors have captured whatever the value in the firm. So, where is the opportunity?
Enter Sweetgreen
When Sweetgreen, a fast-casual salad provider that even salad-haters have embraced, went public it impressed with a $5 billion market capitalization and a $53 share price. Since then, SG has plunged by approximately 80% to around $10 per share.
Trading now at 2.3x sales versus 7.6x sales for Cava, the opportunity is clear for investors who want a piece of the action: Skip Cava and buy Sweetgreen.
For the past nine quarters, year-over-year revenues have grown though the share price struggled as growth slowed. Nevertheless, the past quarter growth was reported at 21.9%.
Perhaps the most exciting aspect of Sweetgreen is the potential to follow in the footsteps of Chipotle, which has a $50 billion plus market capitalization. In cities like St Louis, Chipotle has an enormous presence whereas Sweetgreen has none. You won’t find a Sweetgreen in the stretch north of Miami to Palm Beach either. Yet, St Louis has one of the highest levels of unearned income per capita in the nation while Boca Raton has a huge concentration of health-focused salad consumers.
These are two among many prime spots for Sweetgreen to target and exemplify how long the runway is for Sweetgreen to expand. Like Chipotle, the expanding footprint should translate to higher sales, higher margins, and a higher market capitalization.
With Sweetgreen trading at a price/sales ratio that is almost 70% lower than that of Cava, and having established a loyal fanbase, a strong brand, and with a huge runway of growth ahead, it appears to be the better opportunity now.
While we suspect it won’t trade anytime soon at the same P/S multiple of Cava, a 50% hike in valuation seems very reasonable.
