Where Will Sweetgreen Stock Be in 5 Years?
Sweetgreen (NYSE: SG) is without question one of the best stocks of 2024. Its shares have skyrocketed some 200% since the start of the year. By comparison, the S&P 500 has produced a total return of 19%.
Yet, this booming restaurant stock's monster performance hasn't been enough to prevent it from trading 36% below its late-2021 initial public offering (IPO) price. Investors might still be eyeing the business as a potential buying opportunity.
So where could Sweetgreen be in five years? Let's dig in and find out.
Scaling up
The market appears to be infatuated with Sweetgreen because it's growing at a brisk pace. Revenue surged 21% in the second quarter. That figure was up more than threefold from the fourth quarter of 2020. During the latest period, Sweetgreen opened up four net new restaurants, bringing the total to 225. The goal is to open 25 for the full year.
Each store generates average annual revenue of $2.9 million. And the restaurant-level operating margin of 22% is healthy. What's more, the business expects between a 42% and 50% return on invested capital in cash in the second year a store is up and running. These upbeat unit economics are likely two key inputs influencing the management team's plan to rapidly expand the store base, which looks like a smart strategy.
It's easy to be optimistic, given the popularity of fast-casual dining concepts in the U.S. These restaurants are exhibiting much better growth than the industry overall, which provides a nice backdrop for Sweetgreen.
Where's the profit?
As is the case with newly public businesses, particularly those investing aggressively in growth initiatives, Sweetgreen is unprofitable. Through the first half of fiscal 2024, the company reported $43 million in operating losses.
To be fair, this marked an improvement from the same time a year ago. And it's encouraging that operating expenses actually declined year over year. But Sweetgreen still has a long way to go before its bottom line is in the green.
It's worth mentioning that industry leader Chipotle Mexican Grill, which has almost 16 times the number of stores than Sweetgreen does, posted a stellar Q2 operating margin of 19.7%. The salad concept's bullish investors hope this is achievable one day.
Because the Tex-Mex chain's stores are also all company-owned, it provides an apt comparison. However, it's far from certain that Sweetgreen will get to a position of consistently producing positive earnings. Competitive forces, inflationary pressures, and poor management execution are all risk factors that can get in the way.
Sweetgreen's valuation
Thanks to the stock's huge gain this year, it now trades at a price-to-sales ratio of 5.8, a sizable premium to its historical average. In my opinion, this looks rich at the current level.
When the market is overly enthusiastic about a stock like this, I rarely believe it's a good idea to buy. I think the valuation has a much higher chance of contracting over the next five years than it does staying constant or even expanding. This possible headwind shouldn't be ignored.
Looking out to 2029, what are the chances that Sweetgreen can outperform the broader S&P 500? For this to happen, there's no question that the business needs to maintain its strong growth momentum. If the revenue gains start to slow in a meaningful way, expect investors to react negatively. Moreover, Sweetgreen will need to start generating positive earnings sooner rather than later.
There's a lot of uncertainty as to what this company will look like five years from now. And it doesn't help that the valuation has gotten stretched. There's a greater likelihood of being disappointed by this stock than there is of being rewarded by it.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Sweetgreen and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Where Will Sweetgreen Stock Be in 5 Years? was originally published by The Motley Fool