CAVA Stock Sinks 25% in a Month Is There Strength Behind the Slide?

If you are watching CAVA Group's stock and feeling torn over your next move, you are definitely not alone. The past year has been a wild ride, with CAVA's share price swinging notably over both the short and long term. In just the last month, the stock has slipped about 25%, and year-to-date it is down over 41%. That kind of volatility always catches the eye, especially for a company like CAVA, which has posted steady annual revenue growth of around 17% and net income growth close to 6%.

Despite these gains on the business front, the market seems to be reevaluating its growth story, perhaps balancing out high-flying expectations with a heavier dose of caution. Even so, CAVA's valuation is worth a second look. Right now, it is trading about 37% below the average analyst price target, suggesting analysts see plenty of upside potential from current levels.

If we zoom out to a more methodical assessment, CAVA currently scores a 2 out of 6 on our valuation check system. This means it is considered undervalued in two out of six ways we typically measure. Depending on your investing style, that could either serve as a warning sign or a potential opportunity on a turnaround. But, as with most stocks that are making headlines, the reality is a bit more nuanced than one number can capture. Let us walk through the most common ways CAVA’s valuation gets measured. Then, I will share my personal favorite method for sizing up whether the stock could be a bargain worth grabbing.

CAVA Group delivered -34.0% returns over the last year. See how this stacks up to the rest of the Hospitality industry.

Approach 1: CAVA Group Cash Flows

The Discounted Cash Flow (DCF) model helps estimate a company's intrinsic value by projecting future free cash flows and then discounting them back to today's value. This reflects what those future earnings are worth right now.

For CAVA Group, the latest twelve months' free cash flow stands at approximately $11.45 million. Looking ahead, analysts and estimates project that CAVA’s annual free cash flow could rise to around $159.2 million by 2035, marking a substantial jump over the next decade. This forward-looking approach uses a combination of analyst forecasts and growth rate estimates to map out how quickly the company’s cash flow might expand each year.

Based on these projections, the DCF method arrives at an intrinsic value of $17.59 per share. Compared to CAVA's current price, this model suggests that the stock is 282.9% overvalued relative to its projected future cash flows. In short, if you rely on DCF alone, the numbers imply that CAVA is trading far above what its future cash generation might reasonably justify.

Result: OVERVALUED

Our DCF analysis suggests CAVA Group may be overvalued by 282.9%. Find undervalued stocks based on DCF analysis or create your own screener to find better value opportunities.

Approach 2: CAVA Group Price vs Earnings

The Price-to-Earnings (PE) ratio is a classic valuation tool for profitable companies, as it puts the current share price in context with the company’s actual earnings power. Especially in industries like hospitality, where earnings growth and profitability can fluctuate, the PE ratio helps investors gauge whether market expectations are realistic.

CAVA Group is currently trading at a PE ratio of 55.5x. For context, the average PE ratio for the hospitality industry is about 23.19x, while key peers are averaging slightly higher at 59.0x. Growth expectations and perceived risk play a big role in these figures. A higher PE can be justified if investors believe a company’s profits will significantly increase or if its business is viewed as safer or more resilient than competitors.

To account for these factors, Simply Wall St’s Fair Ratio metric considers not just industry standards but also CAVA’s earnings growth, profit margins, market capitalization, and risks. For CAVA, the Fair PE Ratio is 21.59x. When compared to the current 55.5x multiple, the stock appears substantially more expensive than what would be expected given its fundamentals and the broader market environment.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your CAVA Group Narrative

Beyond financial ratios and models, investors today have access to "Narratives," which offer a simple but powerful way to connect a company’s story and catalysts to numbers like future revenue, earnings, margins, and ultimately a fair value for the stock.

A Narrative is more than just an opinion; it's your personal storyline about the business, backed up by your unique assumptions and outlook. Narratives link what is happening at the company, such as expansion plans, brand appeal, or market risks, to concrete financial forecasts. This approach directly compares the resulting fair value to the current share price, helping you decide if the stock is a buy, hold, or sell.

On the Simply Wall St platform, Narratives are easy to create and share with other investors. This makes it simple to see how different perspectives play out as new news or earnings reports arrive, with your assumptions and fair value updating automatically.

For example, with CAVA Group, one investor might be optimistic and use a high-end analyst target of $125 per share based on fast expansion and margin improvement. Meanwhile, someone more cautious might lean on the lowest target of $72 per share due to concerns over competition or margin pressure.

Do you think there's more to the story for CAVA Group? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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