Will the Prosperity of Cava Stocks Persist Through 2025?
Cava Enterprises (-1.82%) was among the top performers in 2024, despite a recent dip. Over the past year, the stock has soared by over 175%, with many viewing it as a second chance for Taco Bell, as it strives to provide quick, nutritious Mediterranean food to a wider audience.
However, the stock has dropped nearly 25% since early December, leading investors to question: Is Cava in a temporary slump and set for a strong rebound in 2025, or will it face significant setbacks as the value of the eatery stocks continues to diminish?
The status of Cava Enterprises' stock
While the comparison of Cava to "Mediterranean Taco Bell" may be an oversimplification, it's hard to overlook. Consumers and investors will likely remember how Taco Bell built its success by offering healthy, affordable, and tasty food that's served quickly.
Moreover, American consumers have become more health-conscious in recent years, and the media has long promoted Mediterranean cuisine as a healthy alternative. Therefore, it seems like the right time for a fast-casual restaurant like Cava.
In the first 40 weeks of fiscal 2024 (ending Oct. 6), Cava's revenue of $736 million increased by 34% compared to the same period in fiscal 2023. In contrast, Taco Bell's revenue rose by 15% over the same period.
Additionally, Cava's number of restaurants, which reached 352 at the end of fiscal Q3, increased by 21% year over year. Its same-store sales grew by 11% during that period.
Furthermore, Cava's costs and expenses rose by 28% during the first 40 weeks of fiscal 2024, slightly lagging the revenue increase over the same period. This led to a $52 million net income, significantly more than the $12 million during the same time frame in fiscal 2023.
Cava looks poised to improve its performance, having projected 12% to 13% same-store sales growth for fiscal 2024. Since analysts project a 32% revenue growth for Cava for the fiscal year, it seems set for continued success, at least for now.
Cava's growing pains
However, the recent decline in the stock could face a challenge common to growth stocks: decelerating revenue growth. In fiscal 2025, analysts project an annual revenue growth rate of 24% for Cava. While that still represents healthy growth, it's a significant slowdown from the previous fiscal year.
Moreover, Cava's goal of operating 1,000 restaurants by 2032 would nearly triple its number of locations. However, Taco Bell aims to operate 7,000 restaurants in North America by 2030 (it currently operates over 3,600 locations). Since Cava has not publicly outlined plans to expand outside the U.S., Taco Bell may have a larger growth goal, even in percentage terms.
In this future landscape, Cava's valuation differences may disadvantage it. Cava's recent shift to profitability may make its price-to-earnings (P/E) ratio a misleading comparison. Still, Cava's price-to-sales (P/S) ratio of 15 is significantly higher than Taco Bell's price-to-sales multiple of 8, which may leave investors questioning whether Cava is worth the premium.
Where will Cava Enterprises' stock go in 2025?
Under current conditions, investors should expect Cava Enterprises' stock to face challenges over the next year. However, with its strong growth potential and ability to open new locations, Cava Enterprises stock should thrive in the long term, meaning current shareholders should hold onto their shares.
However, decelerating revenue growth tends to hurt stocks with high valuations, a factor that may already be affecting Taco Bell's stock performance. Comparing Cava's valuation to Taco Bell's also highlights how expensive the stock has become, which may deter investors from buying Cava shares.
Ultimately, Cava Enterprises stock should prove to be a winning investment for long-term shareholders. Nonetheless, its long-term investment case appears more promising than its expected performance in 2025.
In light of the discussion about Cava Enterprises' stock performance, investors might consider diversifying their portfolio by exploring opportunities in the field of finance and investing, particularly in other fast-casual restaurant stocks, to balance potential risks.
Given Cava's strong financial performance and growth projections, it might be an attractive option for investors seeking to include high-growth stocks in their long-term investment strategies.
