Has Cava Stock Finally Bottomed Out?

Yahoo

07-04-2025

Tariff talks have been sinking the markets over the past few weeks, and the S&P 500 and Nasdaq Composite have been in and out of correction territory. The good news for investors is that many stocks that are too expensive have been coming down in price, giving them the opportunity to buy on the dip at a reasonable valuation.
Cava Group (NYSE: CAVA) stock is a great example. The company has reported impressive metrics since going public in 2023, and investors have responded by grabbing the stock at seemingly any price, pushing it up to astronomical valuations.
Despite phenomenal performance, the stock has tumbled 23% year to date. Below, I'll look at what's going on and whether Cava stock has finally bottomed out.
Cava operates a chain of Mediterranean-themed fast-casual restaurants with a similar model to Chipotle Mexican Grill. It uses a limited selection of fresh, premium ingredients to customize a large menu of dishes at a price point above fast food but lower than sit-down dining. The restaurants are geared toward affluent customers who want and can pay for healthier fare.
So far, it looks like customers are loving it, and it's growing at a fast pace. Revenue increased 33% in 2024, driven by a 13% increase in same-store sales. That's a very high same-store sales growth rate, compared with industry standards, and implies that Cava has a solid concept that can attract business and generate loyalty.
The company still has a small number of stores and is expanding at a steady pace. It opened 58 stores in 2024 and plans to open about 64 in 2025.
Contribution profit -- which measures how profitable Cava is at the individual restaurant level -- is increasing at a healthy pace, up 34% year over year in 2024, and contribution margin improved by 0.2 percentage points to 25%. That's driving bottom-line growth, and net income skyrocketed from $13.3 million to $130.3 million in 2024.
Cava has only 367 stores, as of the end of 2024, but envisions reaching 1,000 over the next seven years. That implies a major acceleration. However, even if it doesn't hit 1,000 stores by 2032, it should be able to keep up robust growth through store openings and increasing same-store sales.
Management is guiding for a slowdown in same-store sales this year to 7%, and that guidance is part of the reason the stock began to sink earlier this year. Cava pointed out that it isn't planning to increase prices further this year, which accounts for part of the slowdown, since price increases are included in same-store sales growth.
Be wary when too much of same-store sales growth is attributed to price increases since it means the growth isn't coming from more traffic or volume. Management is expecting most of the same-store sales growth in 2025 to come from traffic, which is a positive sign.
The market sees a huge future ahead for Cava. The company has a solid concept and strong execution and is so small that there's a lot of opportunity.
You can see just how enthusiastic the market is from Cava stock's high valuation. Even down this year, it trades at a price-to-earnings ratio (P/E) of 78, which isn't a bargain. However, it might not get any lower. Investors are sensing opportunity in the lower stock price, and Cava stock is already on the upswing.
There's still a lot of reason for caution. Because Cava is so small, there's not a lot of history to rely on when making your investing decision. It could also be negatively impacted by the tariff situation or other economic changes that could be coming.
However, given Cava's great start, if you can buy and hold its stock for at least five years, you likely will be well-rewarded if you buy today. One strategy to use is dollar-cost averaging, where you buy in at different price points to try to benefit from dips.
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Jennifer Saibil 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 March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Has Cava Stock Finally Bottomed Out? was originally published by The Motley Fool