Down 43%, Should You Buy This Growth Stock Like There's No Tomorrow and Hold for 20 Years?

After two fantastic performances in 2023 and 2024, the stock market is not being too kind to investors this year. Investors are worried about the direction of the economy. And there are some companies that are being hit hard with pessimism, even though the underlying financials might paint a brighter picture.

As of April 16, shares of an up-and-coming business are 43% below their peak. This is despite the fact that they've soared 98% since their initial public offering nearly two years ago. It's probably a good idea to thoroughly assess the situation.

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Should you buy this beaten-down growth stock like there's no tomorrow and hold for 20 years? Here's what investors should know.

Entering the fast-casual space

Chipotle Mexican Grill, whose shares are up an impressive 216% in the past five years, is a monster success story in the restaurant sector. A simplified menu, fast service, and reasonable pricing has worked wonders, contributing to the company's growth and ability to attract consumers.

Cava (NYSE: CAVA), the Mediterranean-inspired fast-casual concept, is aiming to replicate its larger Tex-Mex rival's accomplishments. Its focus on quality ingredients, health-forward items, and a customizable menu is working in its favor.

Growth has been the key story. Cava reported revenue of $954.3 million in fiscal 2024 (ended Dec. 29), which was up 35.1% year over year. The business added 58 net new stores to its footprint last fiscal year, bringing the total to 367.

The leadership team wants to reach 1,000 stores nationwide by 2032. Whether Cava gets there will depend heavily on how effective its marketing is, its ability to continuously improve the guest experience, menu enhancements, and finding suitable real estate locations to expand.

So far, it's easy to be optimistic. Same-store sales, one of the most important metrics for restaurants or retailers, surged 21.2% in Q4 2024, supported by impressive traffic growth. This data point is further bolstered by a high digital penetration, representing more than one-third of revenue, and annual unit volume of $2.9 million in fiscal 2024.

Cava's profitability is improving significantly. It posted operating income of $43.1 million last fiscal year, up from $4.7 million the year before. The financials look to be in solid shape.

Thinking about the long term

Due to its smaller scale, it's likely that Cava has yet to develop durable competitive advantages, otherwise known as an economic moat. The presence of this would support long-term success, as it would help the business maintain its position in the industry.

Restaurants can have a powerful brand presence, something that Cava should gain as it expands across the country. There could be advantages to scale as well. Larger chains can better leverage spending on technology, marketing, and their supply chains. At its current size, though, there's much to be desired.

There's a positive spin on this. Economic moats don't automatically form around younger companies. They have to work hard at constantly improving all facets of operations, with the hope of achieving sustainable profitable growth and getting to a stronger industry position. If Cava can continue on its current trajectory indefinitely, then investors have a lot to be excited about.

But that's a big "if." The intensely competitive nature of the restaurant market will make things extremely difficult. Consequently, Cava's ultimate success, particularly looking at the company 20 years out, is almost impossible to gauge.

Making matters worse is the current valuation, which is in nosebleed territory. As of this writing, the stock trades at a price-to-sales ratio of 10.6. This leaves no margin of safety for prospective investors, and it implies that Cava will need to execute flawlessly in the future.

All this means I don't think investors should buy this growth stock today.

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Neil Patel and his clients have 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.