My working thesis on Cava

On Cava's IPO day in June 2023, a reporter asked the CEO if the price was too high. His answer has been rattling around my head ever since: "Valuation is just a reflection of the investor's conviction in the story" (Fortune, IPO day).

Three years later the conviction is an $8 billion market cap. So I stopped trying to predict Cava's future and did something more useful. I reverse-engineered the price as part of my opening research, since this is a very simple business, I want to take this early step so I don't go through the whole research methodology.

First, credit where it's due

Cava is executing. Revenue grew 32% last quarter, comps grew 9.7%, and 6.8 points of that came from real guest traffic, not price hikes. New stores open at volumes above the existing fleet. They run 459 restaurants today and management has promised 1,000 by 2032.

This is not a broken business. That's exactly why it's the right one to study.

The math the price is making

Here's the exercise. A buyer at $8 billion who wants 10% a year needs Cava worth about $14.9 billion by 2032. Assume it matures into Chipotle, the best-case outcome, trading at Chipotle's 28x free cash flow and converting 12% of revenue to cash like Chipotle does today.

Work backward and Cava owes you $531 million of free cash flow by 2032. Last year it produced $26 million.

At 1,000 stores, that requires $4.4 million per store, up from $2.93 million today. Same-store sales have to grow 6.5% a year, every single year, for six and a half years. Cava's actual comp last fiscal year was 4.0%. Two quarters ago it printed 0.5%.

The part that got me

Then I flipped the model. Assume perfection: 1,000 stores on schedule, steady 4% comps, Chipotle's economics AND Chipotle's multiple at the finish line.

The buyer at $8 billion earns 7.4% a year. Index-fund money, for single-stock risk, as the reward for flawless execution.

Could my math be wrong? Sure. Maybe Mediterranean supports pricing power that pushes volumes past Chipotle's. Maybe the whitespace runs well past 1,200 stores. But notice what I just did: I had to invent upside beyond management's own plan just to get a buyer to average returns.

Final thoughts

This isn't a bet against Cava. I really love their food, but "great business" and "good price" are two different questions.

When a story is this good, ask what the price already assumes. Here, the price assumes near-perfection.

First test comes mid-August, when Q2 comps print. I'll be watching.

Sentiment: Neutral for now, but setting price alerts