Assessing the $CAVA Craze: Can the Hype Hold Up?
CAVA 0.00%↑ has quickly become a market darling, especially in the quick-service restaurant space, with its stock soaring 185% year-to-date. This meteoric rise isn't just hype—recent results back up the enthusiasm. CAVA, a Mediterranean fast-casual concept similar to Chipotle CMG 0.00%↑ in the Mexican segment, has shown very attractive unit economics with cash-on-cash returns of 35-40%. The company currently operates 341 company-owned locations and has ambitious plans to reach 1,000 by 2032, and eventually 2,000 over a longer horizon. Their restaurant-level operating margins are an impressive 26%, with an average unit volume of $2.6M—figures that rival Chipotle is at today. Same-store sales, a key indicator of consumer demand, jumped over 14%, with 9% of that growth driven by increased customer traffic. It’s evident that CAVA is executing its growth strategy effectively, making it one of the few positive revision stories in the space. However, the key question remains: Can this momentum continue, or is the stock pricing in perfection?
Bullish Scenario: Flawless Execution
CAVA is undeniably a story stock, driven largely by momentum, and it now trades at elevated multiples. The crucial question is: How expensive is it, and what type of execution does the company need to deliver to justify a respectable return over the next several years? To explore just how high expectations are, let's consider an extremely optimistic scenario for forward business execution.
Currently, CAVA operates 341 restaurants with an AUV of $2.6M. Let’s assume they can ramp up new openings, reaching 800 locations by the end of 2028. If we also assume a combination of higher SSS and larger ticket orders, AUV could increase to $3.6M from today’s $2.6M, resulting in an annualized revenue run rate of approximately $3B. To make this bullish scenario even more aggressive, let's assume restaurant-level margins reach 30% (currently around 26%, though expected to dip short-term) and that G&A expenses are managed extremely efficiently at 6% of sales (down from the current 12%). Combining all these factors, CAVA could achieve $3B in sales, with 30% restaurant-level margins and 24% adjusted EBITDA margins. For context, current sell-side estimates project just under $2B in sales, with 26% restaurant-level margins and 15% adjusted EBITDA margins. Clearly, this scenario is very bullish, assuming CAVA hits it out of the park on all fronts.
As an investor, the question is: What multiple does CAVA need to trade at in 2028 to generate sufficient returns over the next four-plus years? A sensitivity analysis suggests that for an investor seeking a 10% annualized return, CAVA would need to trade at a 25-30x adjusted EBITDA multiple in 2028, assuming the scenario outlined above. This outcome is plausible if one believes CAVA can accelerate its restaurant openings, expand its footprint from the planned 2,000 to 3,000 locations, and maintain attractive unit economics with 40% CoC returns—justifying a premium multiple. While many may dismiss this as overly optimistic (and they wouldn’t be wrong), it’s not entirely out of the realm of possibility. There are undoubtedly bulls who believe this scenario is achievable.
Base Scenario: Sell-Side Consensus
The more tempered sell-side consensus for 2028 estimates CAVA generating just under $2B in revenue, with 26% restaurant-level margins and 15% adjusted EBITDA margins. Under this scenario, CAVA would need to trade at a 70x adjusted EBITDA multiple in 2028 for an investor to achieve a 10% annualized return. However, if things play out as currently estimated, it’s hard to imagine a fast-casual restaurant with a limited competitive moat trading at such lofty levels. If CAVA trades at more normalized multiples, the stock could easily see its value cut in half, even if the business continues to execute well operationally.
While I won’t delve into a specific downside scenario, it’s important to note that as a fast-casual restaurant, CAVA faces numerous risks. These include potential food safety issues, intense competition from both large, publicly traded companies and small, independent restaurants, exposure to economic fluctuations, and operational challenges as the company scales. Chipotle pioneered the assembly line model with fresh, high-quality ingredients. CAVA has adapted this proven model to Mediterranean cuisine. However, given the strong unit economics, it’s likely that CAVA will attract more competition, crowding the space further and intensifying the fight for consumer dollars.
Bottom line: CAVA has done an outstanding job executing its growth strategy, but the stock’s current valuation seems to be pricing in flawless execution going forward. At today’s valuation, investing in the company appears to be a fool’s errand.
Disclosure: The author holds a short position on CAVA through call spreads with various strikes and expiration dates and reserves the right to buy/sell without notification.