(Bloomberg) — Of all the successful IPOs of the past year — AI companies and biotech startups and the like — none has hit Wall Street like Cava Group Inc.
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The restaurant chain — the Mediterranean Chipotle, as its backers like to call it — is up more than 300% since its initial public offering in June 2023, giving it a market value of more than $10 billion. That amounts to $33 million for each of the 323 restaurants, a staggering amount even for a chain that is growing rapidly. By comparison, investors valued Chipotle Mexican Grill, the benchmark in the U.S. fast-casual restaurant industry, at only about $3 million per restaurant when it reached the one-year mark on the public markets. (Given the price-to-earnings ratio, Cava is also expensive, with a value of 185.)
All this underlines how the global IPO market is opening up again after a few slow years. Bring the right kinds of new stocks to market, like a trendy fast-casual chain, and investors will bid for them.
But the rally has been so extreme that it is starting to cause fear among some Cava bulls. In just four days, two of the 15 Wall Street analysts covering the company – JPMorgan Chase’s John Ivankoe and Piper Sandler’s Brian Mullan – downgraded the stock from overweight to neutral.
The valuation per restaurant “is unprecedented” in the sector, Ivankoe wrote in his June 3 report. Each location, he noted, currently generates an average of less than $3 million per year in revenue. He told clients he’d rather buy Chipotle stock right now, underscoring a broader trend: Two-thirds of analysts have a buy rating on Chipotle, compared to just over half now for Cava.
Some business insiders have also recently sold off portions of their Cava shares. For the most part, however, investors remain willing to accept such lofty valuations. Even after a slow start to June, Cava is up more than 100% this year. Fast casual is popular on Wall Street these days, and Cava, as they see it, is the newcomer that will follow Chipotle’s lead.
“Investors are willing to pay a premium for these growth-oriented concepts,” said Jim Salera, an analyst who covers restaurant stocks at Stephens. Salera, who does not have a rating for Cava, says they will “pay that premium because there are only a handful of restaurants that drive growth.”
For Lauren Balik, the CEO and founder of research firm Upright Analytics, the whole Cava-is-the-next Chipotle story is complicated. Yes, she says, Cava could expand quickly like Chipotle did — the company plans to have 1,000 restaurants in operation within a decade — and business could boom, but that growth comes with its own risks. Chipotle struggled to standardize sanitary conditions as it quickly added restaurants, leading to a series of food poisoning incidents that made national news and sent its shares plunging in 2015. It took Chipotle a while to get its procedures in order, and its stock only started to recover after two years. later on.
Cava has managed to avoid such problems and has opened more than 50 locations in the past year without any significant quality problems. Still, Balik says it’s a good reminder that rapid growth can cause operational hiccups. She is betting against the stock after shorting it in January.
“Everyone makes the comparison to Chipotle. When you make that comparison, you have to compare Cava to early Chipotle, which was a similar story,” Balik says. “It opened a lot of new stores, it grew quickly, but the operations and execution at the end of 2015 were not working very well.”
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