Can CAVA Stock Be the Next Chipotle? Earnings Can Help

Key Points

• CAVA stock is now being called the next Chipotle, and recent price action and financial results give investors reason to justify that call.
• Growth rates in CAVA could give it preferred status in the coming years, as Goldman predicts a lost decade in the S&P 500.
• Wall Street analysts agree by calling for further double-digit rallies in CAVA stock for the coming months.

Some stocks seem under the radar in some of the most underrated sectors in the market, such as retail stocks, in a world where technology stocks and artificial intelligence are all the hype. One success story in the restaurant industry is Chipotle Mexican Grill Inc. NYSE: CMG, after the stock compounded by over 700% in the past decade to leave the broader S&P 500 behind.

How could a restaurant chain do so well in the market? Can any other brand attempt to replicate its success in today’s landscape? Those are the questions that a new contender is looking to answer. That contender is CAVA Group Inc. NYSE: CAVA, the newer build-and-go restaurant concept making a splash in the market and on investor screens today.

As the stock has already rallied by over 369% in the past 12 months, some may be wary of even considering it near its highs. However, today, that story and sentiment might change. While whether the company can overtake Chipotle in its own game is still up for debate, CAVA’s latest quarterly earnings results show one decisive trend for the stock ahead.

Why CAVA’s Growth Could Be Key for Investors to Thrive Over the Next Decade

There are reasons to believe that the next decade will be a “lost” one for the S&P 500. At least, that’s what Warren Buffett and Goldman Sachs are calling for in their most recent projections and assessments. This means that there will be little to no growth in the coming years, so investors need to get picky.

This is why investing in high-growth companies will be a key factor for success under this scenario and where CAVA beats Chipotle. Whether recent growth is enough to let CAVA’s $16.8 billion market capitalization catch up to Chipotle’s $80.7 billion is yet to be known. Still, one thing is sure: double-digit growth might eventually be achieved.

CAVA’s latest quarterly earnings results show growth potential, with revenues growing by as much as 39% on the year compared to Chipotle’s 13% growth rate for the same period.

To deliver, and most importantly, to keep delivering, these growth rates, CAVA needs to have enough capacity to back projections. The 11 new CAVA restaurant openings during the quarter alone took care of this, all operating at a restaurant-level profit margin of 25.6% despite not having the scale that Chipotle counts on.

On the other hand, Chipotle’s restaurant-level margins declined to 25.5%, giving investors second thoughts about whether Chipotle can remain the leader in this business model compared to CAVA. The tie-breaker and the answer to this question might come from one of the most common KPIs for the retail sector.

Comparable sales metrics, which measure sales growth excluding the addition of new locations, were up by 18.1% on the year while only pushing as little as 6% for Chipotle during the same period. Ultimately, CAVA’s free cash flow holds the key to future upside, as the company recorded quarterly profitability.

Posting up to $23.3 million of free cash flow for the quarter compares to the negative outflow of $9.1 million a year prior. Such a jump does justify the triple-digit rallies that CAVA pulled off over the past 12 months. However, this is only half the equation; now, investors need to check on Wall Street’s side of the equation to figure out where the next steps are.

Wall Street’s Bullish Take on CAVA Stock Signals More Upside Ahead

Even as the stock already trades at 85% of its 52-week high, Wall Street analysts are still willing to price the company higher moving forward. Especially those at Stifel Nicolaus recently reiterated their “Buy” rating on the company, boosting their valuations up to $175 a share.

To prove these new valuations and views right, CAVA stock would need to rally by as much as 20% from where it trades today, not to mention a new high price for the year. Backing these valuations is the earnings per share (EPS) growth forecast for the next 12 months, which now expects to see up to $0.24 in earnings.

This implication would call for a near doubling in CAVA’s EPS compared to today's $0.15, which should eventually cause the stock price to pull off a similar rate increase. Bearish traders seem to accept that the upside potential is too solidified for CAVA stock today, as the company’s short interest declined by 3.7% over the past month alone.

Bearish capitulation is coupled with institutional buying, and that’s typically a very strong signal for investors to keep in mind when justifying their bullish views on a stock. Today, those at FMR LLC decided to boost their CAVA positions by 0.9% as of November 2024, bringing their net holdings to a high of $431.6 million, or 3.1% ownership in the company.

All of the tailwinds are there, and superior growth could lead to further buying of CAVA stock in the coming years, especially as all the factors are aligned for it to pull off new rallies.