Is it too late to buy Cava shares?

In a year in which investors’ attention was focused entirely on artificial intelligence (AI), CAVA Group (CAVA 0.29%) has quietly been one of the best performing stocks on the market.

The fast-casual chain’s shares have risen 184% year-to-date through August 23 after the company released a series of underwhelming earnings reports that suggest it is heading for the next Chipotle Mexican Grill.

While Cava’s uptrend is certainly good news for investors who bought shortly after its IPO last June, there’s a more important question for those who have been watching from the sidelines. Is it too late to buy Cava stock? Let’s take a look at where the company stands today and its long-term prospects.

Image source: Cava Group.

The rapid growth of Cava

Cava’s second-quarter results help explain why the stock has risen so sharply this year, as the company delivered superior results on virtually every key metric in the second quarter.

Comparable sales increased 14.4%, including traffic growth of 9.5%, showing that the customer base is growing and customers are visiting the store more often.

In addition, the company is expanding rapidly: in the second quarter, 18 new locations were added and the base was increased by 22%, contributing to a 35% increase in revenue to $231 million.

Cava’s average sales have reached $2.7 million, not far from Chipotle’s $3.1 million, showing that the company’s restaurants are popular. At the same time, the company’s profitability is rising rapidly. Restaurant-level profit margins improved to 26.5 percent from 26.1 percent in the year-ago quarter, compared to Chipotle’s 28.9 percent, the gold standard in the industry.

Cava’s profits are also rising rapidly: Net income tripled to $19.7 million in the quarter, giving Cava a profit margin of 8%. That’s impressive for such a young restaurant company, as that margin is expected to increase as the company grows.

The company also managed to build a strong digital business, with digital sales accounting for 36% of revenue in the quarter.

What’s next for Cava?

Cava ended the quarter with 341 locations and appears to have room to grow given the strong demand for its product. Using Chipotle as a comparison, the burrito chain now has around 3,500 locations and expects to double that number to 7,000.

Cava CEO Brett Schulman said in an interview earlier this year that the company aims to have 1,000 stores by 2032. That goal could prove modest if Cava can maintain its current momentum, which was driven in part by the launch of a new grilled steak that management said has “significantly exceeded expectations.”

Cava increased its forecast for the number of store openings for the year to 54-57, showing that the company is already making great strides toward its goal of 1,000 stores. It also raised its forecast for store sales and profit margins at the restaurant level.

Is it too late to buy Cava?

Cava’s breakout earnings were justified, but the stock is expensive. It trades at a price-to-earnings (P/E) ratio of over 300, although those estimates are likely to rise after the latest report. On a price-to-sales basis, Cava is also expensive, with a price-to-sales (P/E) ratio of 14.

Comparing Cava to Chipotle, the company’s market capitalization is now $14 billion, nearly a fifth of Chipotle’s market value of $73.6 billion, even though Cava has only 10% of Chipotle’s locations.

In other words, investors expect Cava’s earnings to soar, and that expectation is largely reflected in the stock price.

Still, the company has a number of qualities that could make it the next big fast-casual chain, including the backing of Ron Shaich, the founder of Panera Bread who is now Cava’s CEO, and the stock remains positioned to be a long-term winner.

Given the high prices, it would be a good move to take a small position in Cava shares today and buy them opportunistically on dips. While high expectations are priced into the stock, if comparable sales growth remains in double digits, earnings will continue to rise.