Investors have gone wild Group of Cava (NYSE: CAVA) stock since it debuted on the market in 2023. I mean that almost literally: it’s up 174% over the past year, and its valuation is total.

While Cava has a lot going for it, some investors may be waiting on the sidelines for a better entry point. Is it finally here? Cava shares are down 25% in the last month. Let’s take a look at why this happens and whether or not this is the attractive entry point you’ve been waiting to see.

The cava is presented as follows Chipotle Mexican Grill. Investors who missed Chipotle’s massive gains are trying their luck with Cava. It has a very similar concept: fresh, healthy, premium ingredients that can be customized into all kinds of salads, bowls, and entrees. Cava serves Mediterranean cuisine in a fast-casual setting, and its model of having all the ingredients prepared and ready for customization, rather than cooking fresh to each customer’s order, lends itself to quick preparation of meals This in turn leads to satisfied customers, higher sales and increased margins.

In fact, that’s how it played out. Sales rose 39% year-over-year in the third quarter, and net income rose from $6.8 million to $18 million. It also benefits from strong comparable sales (comps), which were up 18.1% year-over-year in the quarter. This is a great sign of customer loyalty, and implies that Cava can replicate its success with new restaurants for many years to come.

Right now, Cava only has 352 restaurants, but each is generating plenty of sales, and average unit volume rose from $2.7 million in the second quarter to $2.8 million in the third quarter. As purchases increase, each store’s fixed costs cover more sales and drive the restaurant’s bottom line operating margin higher Restaurant-level operating profit increased 42% in the quarter and restaurant-level operating margin was 25.6%, up from 25.1% last year.

Cava is growing at a fairly slow but steady pace, with 43 stores opening in the first nine months of 2024. Since each of its stores generates strong sales, it can vastly increase its total revenue at this rate of store openings, and has a long road of future growth ahead of it.

These are the good points. Now, get ready for the other side.

The cava is young and faces good competition. Not only is it up against Chipotle, but there have been many chains entering this space, including sweet greenand Brassica, a small chain Chipotle is investing in that competes directly with Cava in Mediterranean fast-casual. 352 is a small restaurant count and there could be many challenges in growing that number into a true chain restaurant contender.

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It is already a very expensive action, with a price-benefit ratio Ratio (P/E). of 245. This means that much of the future growth could already be incorporated into the price.

However, note that the forward price/earnings-growth (PEG) ratio is 0.8. A PEG ratio below 1 could suggest that the price is still cheap relative to its future earnings growth, so the market still sees potential for Cava stock to continue rising.

Wall Street is mixed on these stocks. However, only 44% of analysts call it a buy, which doesn’t speak to a lot of confidence. The average price target is $150, which is 33% higher than today, although this could be skewed by one analyst’s $195 price target.

The price decline seems to have started after a wave of insider selling, which could indicate that management itself sees it as a bullish. But it’s not that simple, as shares of Sweetgreen and Chipotle have been falling at the same time. Restaurant stocks often move together, like any industry. However, it makes sense that the price of Cava is starting to drop. It’s hard for any stock, even a young growth stock, to command that kind of premium.

So where does this leave investors? Cava is doing a good job of scaling profitably, and the market may not let it drop too far before investors spot an opportunity and push it back up. It’s too expensive for my taste to buy even at this price, but risk-tolerant investors with a long-term horizon could make a reasonable case to buy it on the downside.

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Jennifer Saibil has no position in any of the aforementioned stocks. The Motley Fool has positions and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and Sweetgreen and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has one disclosure policy.

Cava shares are down 25% in the last month. Is it time to buy? was originally published by The Motley Fool