Should You Buy Cava Stock Before Feb. 25?

The market has been all over Cava Group (NYSE: CAVA) stock since it debuted as a public company in early 2023. It's up 122% over the past year, but it might be losing steam. Investors might be wary about just how good its earnings results are going to be when it reports on Feb. 25, especially considering how much growth is already built into its stock price. With the price moving down as we get closer, should you buy before the release?

Why the market loves Cava

Cava is one of the newer fast-casual restaurant chains that have stormed the markets in recent years. They're all aiming to imitate the success of Chipotle Mexican Grill, one of the original fast-casual concepts, and one that has delivered incredible gains for investors.

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Like Chipotle, Cava's model includes fresh, premium fare, with a limited number of ingredients that are easy to prepare but can be customized into many different dishes. Cava's concept centers around a Mediterranean menu. Its price point is higher than standard fast food like McDonald's, but lower than fine dining, and that appeals to an affluent clientele even in an inflationary climate.

The chain has been taking off. It only operated 352 stores as of the end of the third quarter, but the plan was for about 57 new stores in 2024, and it thinks it can reach about 1,000 stores by 2030. That should generate steady growth over the next five years, but it's still way below Chipotle's current store count of 3,700, and it could continue to grow at a healthy pace after 2030.

It's not just store growth and sales growth that have been impressive. It's reporting higher comparable sales, which means people are coming back for more. It has also been reporting positive net income since its first quarter as a public company, and it's growing.

In Q3, total revenue increased 39% year over year, and comparable sales increased 18%, which is a phenomenal showing. Restaurant-level profit margin increased from 25.1% to 25.6%, and net income climbed from $6.8 million to $18 million. Management raised its outlook for the fourth quarter to about 12.5% comparable sales growth and 24.5% to 25% restaurant-level profit margin.

Risks to be aware of

Cava stock has been falling over the past two weeks, which isn't unusual before an earnings report, especially when there's been a lot of momentum. However, there are other factors that could be influencing the stock drop, such as worries about economic policy.

That highlights the risks of investing in a young company with a high valuation. As well as Cava is doing right now, it's still a fairly small company, and buying now is a vote of confidence in what it can become. Growing a company to triple its size requires a certain skill set. It's also facing competition from many new fast-casual chains, and from Chipotle itself.

As for valuation, Cava trades at a forward, one-year price-to-earnings (P/E) ratio of 134, which is astronomical, especially for a non-tech company. Although the market isn't necessarily reasonable, at this price, the near-term upside doesn't look so high.

Is now the time to buy?

If Cava releases another flawless report on Feb. 25, the stock is likely to jump. But if there's anything disappointing, such as an earnings miss or mediocre outlook, the stock is likely to drop. There's a lot of confidence wrapped up in such a high valuation.

I think that Cava has a bright future, and over the next five to 10 years, it should keep up steady and strong growth. If you have that time to hold, it won't matter too much if you buy today or after the earnings report; you can't time the market. However, I would caution buying at this price, because there are a lot of high expectations built into it. I recommend waiting for a more attractive entry point. Another option when the potential looks good but the price is high is to use a dollar-cost averaging strategy to build a position over time.

Should you invest $1,000 in Cava Group right now?

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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.