Is Sweetgreen Stock a Buy?

Restaurant chain Sweetgreen (NYSE:SG) has experienced severe share price volatility since its 2021 IPO.

From a record closing price of $53 in November of 2021, the stock has plummeted to trade just above single digits today.

Despite this rapid drop in share prices, Sweetgreen has a potentially profitable expansion plan and appears to fill a unique and underserved business niche. 

If you’re not already familiar with it as a consumer, it is a fast-casual restaurant chain specializing in healthy salad bowls.

Through its salad-driven menu and use of daily fresh produce, the compan offers dining options to health-conscious consumers. Sweetgreen plans to expand from its relatively small current restaurant base to a total of 1,000 nationwide restaurants by the year 2030.

Losses Forecast But Growth Is Fast

While growth has slowed over the past two years, Sweetgreen’s small size gives it a great deal of room to continue expanding. In the most recent quarter, the company reported year-over-year revenue growth of 22 percent. Average unit volumes also improved from $2.8 million last year to $2.9 million this year.

In terms of earnings, however, Sweetgreen remains deeply unprofitable. The company’s net losses over the trailing 12-month period totaled $190.4 million, and its net margin was -34.6 percent. These numbers are, however, expected to improve over the next year.

Analysts forecast losses per share of $0.80 in the forward 12-month period, compared to $1 in the trailing 12 months. The company’s shrinking losses are already showing up in current reporting. Sweetgreen reported a loss of $35.3 million last quarter against $50 million in the year-ago period.

Source: Pixabay

Sweetgreen also appears to be expanding its restaurant base at a decent pace. Management expects to open 30-35 new restaurants in 2023, with nine opened in the first quarter alone. The company’s expansion plan is key to its long-term success, as the revenues generated from a larger number of restaurants could help drive eventual profitability.

A final point investors should be aware of is the fact that Sweetgreen has embraced innovation to drive its growth. Digital sales account for over 60 percent of its total revenues, well above even the level reported by Chipotle.

Is Sweetgreen Stock a Buy?

Analyst price forecasts are for the stock to hit $10.50, about in line with where the stock currently sits. The consensus rating for the stock is a hold, though four of the nine covering analysts rate it as a buy.

Due to its lack of profitability, Sweetgreen cannot be valued by earnings-based metrics. One encouraging factor, however, is its price-to-sales ratio of 2.3. This places the company well below many other fast-casual restaurant chains.

Indeed CAVA, which recently held its public market debut, trades at over 7x sales. And Chipotle trades at 6.3 times sales. Chipotle is a highly profitable company that is expected to continue growing its earnings rapidly over the next several years.

Is Sweetgreen Overvalued?

Despite a favorable price-to-sales ratio, Sweetgreen’s largest single drawback seems to be its valuation.

Even after its sharp decline and loss of value, Sweetgreen is priced at a level that assumes extremely high growth rates for the foreseeable future. Practically any obstacle to that growth could send share prices lower.

As the company’s short price history already indicates, investors in Sweetgreen seem quite willing to sell when difficulties arise.

The gulf between restaurant-level profitability and the company’s losses is also a major problem for Sweetgreen. Management expects restaurant-level profitability of 15-17 percent for 2023, and the Q1 report detailed a profit margin of 14 percent.

One of Sweetgreen’s enduring challenges, however, is the fact that its costs at the corporate level substantially outweigh the profits generated by its restaurants. While growing revenues are going some way toward alleviating this problem, Sweetgreen is still struggling with excessively high costs.

Sweetgreen is also attempting to succeed in the restaurant world by introducing foods that appeal mostly to health-oriented consumers. Many major fast-food chains have seen healthier menu options fail over the years, raising questions about the market potential of such items as the main source of revenue for a new chain. While Sweetgreen’s reasonably high average unit volumes nullify this concern a bit, it remains to be seen how well the chain will do over time.

A final risk investors need to consider is the fact that Sweetgreen is rapidly spending down its cash reserves. Between the end of Q4 and the end of Q1, the company’s cash stockpile dropped from $331.6 million to $296.8 million. Though this cash burn rate won’t exhaust the company’s resources immediately, it’s clear that Sweetgreen will need to slow it down in the relatively near future.

Is Sweetgreen a Buy?

On paper, Sweetgreen has several possible advantages. The market for fast-casual dining is expanding rapidly, and consumers are beginning to make healthier choices with regard to eating out. With a small starting size and the potential to expand considerably, Sweetgreen seems to be the right company in the right place at the right time. Early investors clearly believed in the stock’s potential, as it soared on its IPO date before beginning to fall.

Despite the promising business model, Sweetgreen’s stock has too many problems for it to be a reasonable investment at this time. Deeply negative net margins, high administrative costs, a valuation that prices in an overly optimistic amount of growth and a drawdown of cash reserves all raise concerns for investors.

At this time, Sweetgreen simply carries too many risks to justify it as an investment. If future revenue growth or cost-cutting measures allow the company to turn a profit, it could become much more attractive. At this time, however, the company’s seemingly low price-to-sales ratio when compared to its competitors may make it more of a value trap than a value buy.

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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.