In the world of stocks, the spotlight is typically on tech giants and AI advancements. However, two fast-casual restaurant chains — Sweetgreen and Cava — are making waves on Wall Street. Known for their fresh and customizable salad options, these “salad hawkers” are proving that investment opportunities can come from unexpected places.

Sweetgreen and Cava Outshine Tech Stocks

Shares in Sweetgreen have skyrocketed over the past year, more than tripling in value, while Cava has seen an even bigger surge, climbing over 300%. This rise surpasses even some tech giants, such as Nvidia, which reported a 232% gain.

Currently, Sweetgreen is valued at around $4.1 billion, although it hasn't yet turned a profit. Meanwhile, Cava, which recorded its first profitable year recently, trades at a valuation that’s nearly 300 times its earnings. This rapid growth has turned heads, but there’s a looming question: can these valuations hold up?

Economic Challenges Facing the Restaurant Industry

While Sweetgreen and Cava are thriving, the broader restaurant industry is struggling. As consumer spending tightens, major chains like McDonald's and Yum Brands (KFC’s parent company) report declining sales. Price hikes, once a go-to strategy, are no longer enough to balance the books. Notably, well-known names like BurgerFi and Red Lobster have filed for bankruptcy this year.

Yet, Sweetgreen and Cava’s performance bucks this trend, with both companies reporting robust growth in 2023. Sweetgreen’s same-store sales climbed 9% in Q2, while Cava posted a 14% increase, and their revenues rose 21% and 35%, respectively. It’s these impressive numbers that attract investors hoping to find the next Chipotle.

Could Sweetgreen and Cava Be the Next Chipotle?

The comparison to Chipotle isn’t far-fetched. Both Sweetgreen and Cava have adopted Chipotle’s assembly-line service model, where customers customize their meals from a range of fresh ingredients. This system keeps food waste, labor costs, and wait times down, which contributes to their efficiency.

However, there are some critical differences. Despite similar restaurant-level profit margins, Cava’s operating margin is less than half of Chipotle's, and Sweetgreen’s remains negative. Expansion, marketing, and administrative costs eat into their profitability, setting them apart from Chipotle’s highly profitable model.

Moreover, the valuation gap is notable. Chipotle’s market cap stands at $23 million per restaurant, while Cava’s current market value equates to $46 million per location, though each Cava restaurant generates only about $3 million annually.

The Verdict: Are Sweetgreen and Cava Worth the Investment?

Investors have a lot to consider. On one hand, Sweetgreen and Cava are two of the most exciting growth stories in the fast-casual dining world. But on the other, their valuations are steep, and profitability challenges remain.

For those eager to invest in the next big restaurant success, Sweetgreen and Cava offer intriguing potential. However, the challenges in the current economic environment and the need for long-term profitability make these investments a risk that might not be for everyone.

Source: (FT.Com)