Is Sweetgreen a Good Stock To Buy?

Sweetgreen (NYSE: SG) stock is up by more than 2x over the past year and if bulls are right, that may just be the beginning.

For those who don’t love salads, we can attest to the fact that Sweetgreen salads are among the tastiest we have ever tried. But the company hasn’t reached national consciousness yet. 

Largely, Sweetgreen has a presence in New York, California, Florida and other big states and cities but it hasn’t hit the McDonald’s level of market saturation. That may be on the cusp of changing, though, because this salad shop founded by three Georgetown University graduates has delivered such tasty, yet health-conscious and sustainably sourced salads and bowls that it’s been a hit wherever it’s landed.

So is the stock a buy on plans for further expansion?

1,000 Reasons to Buy Sweetgreen

At its core, Sweetgreen is a fast-casual restaurant that has tapped into a niche of consumers wishing to grab healthy food on the go.

Where past generations ducked into KFC, Burger King or McDonald’s, the younger generation is choosing Cava and Sweetgreen. 

It’s on the back of that shift in consumer preferences that Grand View Research expects the fast-casual restaurant segment to grow at a compound annual growth rate of 10.3% from through 2028.

Sweetgreen management is planning to ride that wave of market expansion by growing from 160 locations in 2023 to over 1,000 by 2030.

With a strong brand reputation already established and a loyal customer base, Sweetgreen has the potential to hit that lofty goal and then some.

1 Reason Sweetgreen Is Thriving

Tasty menu items aren’t the only reason Sweetgreen is soaring. Another key factor to its success has been the ease with which it has made ordering possible.

Walk into any store in Manhattan around lunchtime and you will see dozens of Sweetgreen salads ready for pick-up. There is a reason on-the-go ordering has been so successful and it’s because the company has heavily embraced digital technology and made mobile app ordering as simple as it gets.

Add in loyalty rewards to the mix, and you can see why customers keep coming back time and again. Remarkably, in 2022, digital sales accounted for over 75% of total revenue, highlighting the effectiveness of Sweetgreen’s digital strategy.

Technology has been a focus for management and that’s no more evident than Sweetgreen’s acquisition of Spyce, a Boston-based restaurant company known for its robotic kitchen technology.

This goal of the purchase is to improve operational efficiency, reduce labor costs, and maintain food quality in order to ultimately boost margins.

Financial Performance and Valuation

As you might expect from a company that is loved by its customers, Sweetgreen’s valuation has been on the rise in tandem with increasing revenues.

In 2023, the company reported revenues of $500 million, up 25% year-over-year. The downside was on the bottom line whereby net losses widened to $100 million, primarily due to high operating expenses and costs associated with expansion.

Investors have largely dismissed the profitability concerns as management focuses on increasing average unit volumes, optimizing labor costs, and leveraging technology to help improve margins over time.

On the whole, analysts forecast that the on-the-go fast casual salad provider will achieve profitability by 2025, though that assumed strong revenue growth and good control of costs.

When viewing the company through a valuation lens, Sweetgreen is a little pricey with a price-to-sales ratio of approximately 6x, which is fairly high compared to industry rivals.

Nonetheless, this elevated valuation reflects the market’s optimism about Sweetgreen’s growth potential and brand strength. 

What To Look For?

For new investors, it’s worth paying attention to some key items, with profitability to the forefront. If 2025 comes and goes without the bottom line flipping from red to black then the investors will almost certainly punish the stock with a lower valuation.

It’s also worth paying attention to Cava, in particular. In the fast-casual healthy options space, Cava is a real-threat to Sweetgreen.

Where McDonald’s and Burger King will hold their loyal clientele, who are not necessarily a target market for Sweetgreen, the emergence of Cava is a real threat to health-conscious consumers.

So too is the pocketbook of consumers that is increasingly stretched by economic concerns, higher interest rates and inflation pressures on food more generally. For Sweetgreen, the threat of inflation is also real as well as the hurdles of supplying organic ingredients locally at scale.

Has Sweetgreen Ever Been Profitable?

Over the past 20 quarters, Sweetgreen has never been profitable, though analysts forecast it will be in 2025.

Overall, Sweetgreen has the potential to be a really good long-term investment opportunity given that awareness of how good its product is has not yet hit the mainstream.

It’s also got solid tailwinds among health-conscious consumers who want great food on-the-go. The company’s adoption of technology-led solutions both in production and ordering is only going to further improve margins and accelerate the path to profitability.

Nonetheless, competitive pressures and threats from rivals, not least Cava, as well as challenges in sourcing quality local ingredients at scale may hinder fast growth.

The bottom line is Sweetgreen is an attractive play for investors with higher risk tolerance and according to analysts has upside potential to $33 per share. Notably, a discounted cash flow forecast is more pessimistic and puts fair value closer to $18 per share. Will the analysts or the cash flows be right? Stay tuned to find out by putting Sweetgreen on your watchlist.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.