Will Sweetgreen Double Again?

Shares of fast-casual salad and bowl restaurant chain Sweetgreen (NYSE:SG) have surged by an incredible 144% so far this year, making it the top-performing American restaurant stock.

With such strong returns under its belt, investors are understandably interested in the stock’s future potential.

Can Sweetgreen 2x again, or has the stock started to run out of steam for the time being?

Why Did Sweetgreen Double?

To determine if Sweetgreen can double its price again, it’s first important to understand what’s driving its current price momentum.

Fundamentally, much of Sweetgreen’s ascent has been driven by a Q1 earnings report that handily beat analysts’ expectations.

In the quarter, Sweetgreen delivered 26% year-over-year revenue growth to reach $158 million. Analysts had forecast $152 million in revenue, leading to a surge in investor enthusiasm and a single-day gain of 34% for the stock when the report dropped.

Another huge plus for Sweetgreen was a beat on same-store sales. The company reported 5% year-over-year growth, compared to the 3.7% expected by analysts.

By keeping this number above expectations, Sweetgreen showed that it has the ability to squeeze more value from its existing restaurants while it continues to add new ones.

In addition to higher revenues, Sweetgreen expanded its restaurant-level profit margin to 18%. This compared to 14% in the year-ago quarter, a substantial gain for the company.

The increase in restaurant-level profitability helped the company improve its losses from $0.30 per share in the year-ago quarter to $0.23 per share in Q1. Crucially, this was the sixth consecutive quarter in which net margins improved.

The company is also broadening its consumer appeal by adding steak dishes to its menu of healthy foods, a move that could set the stage for considerably more revenue growth.

While the chain already had chicken and salmon options in addition to its mostly vegetarian menu, adding steak bowls to the menu could entice new customers to try the company’s food.

By expanding its menu to appeal to more customers, Sweetgreen is likely to continue to drive higher same-store sales while also increasing the revenue contributions of its new locations.

A final driver of the recent price surge was management’s updated guidance for the full year of 2024. The company’s revenue estimate for the year was raised to $660-$675 million, while the same-store sales growth forecast was updated to 4-6%.

Sweetgreen’s Growth Runway

In the long run, Sweetgreen has substantial opportunities for growth. At the moment, the chain has about 230 locations, a number that continues to expand with each passing quarter.

The company hopes to expand its number of restaurants by 15 to 20% yearly. Though management hasn’t released a specific number for its target number of eventual locations, it’s highly probable that one day there will be thousands of locations nationwide.

Beyond simply increasing the number of stores, management is also attempting to make each store more efficient. To this end, the company has developed what it describes as its Infinite Kitchen, a heavily automated kitchen model that uses robotic tools to perform basic tasks like tossing salads.

This system, which will be deployed in more stores as time goes on, has been shown to increase delivery speeds and help to further improve restaurant-level profit margins.

What Challenges Does Sweetgreen Face?

At the moment, two key challenges stand out in Sweetgreen’s business.

The first of these is the fact that the company is still losing money at a fairly steady pace. Despite significant improvements over the last year and a half, the company still lost over $26 million in Q1. This translated to a net margin of about -16.5%.

These losses aren’t a huge problem for the company due to a lack of debt and a cash reserve of over $240 million, but it will still need to make further progress toward profitability going forward in order to have a chance of doubling again.

Secondly, much of Sweetgreen’s same-store sales growth is currently being driven by price increases. Though this has resulted in better-than-expected growth, it likely has its limits.

In an environment where consumers are becoming more cost-conscious, Sweetgreen must walk a fine line between keeping sales growing and pricing itself out of the range of customers looking for good values at restaurants.

Is Sweetgreen Overvalued?

Another consideration in terms of whether Sweetgreen stock can keep up its bullish momentum and that is the question of whether it’s overvalued at its current price.

Trading at 5.2x sales and 6.8x book value, there is little doubt that Sweetgreen shares command a premium pricing.

Given the potentially long growth runway, though, these multiples may well be justified. So, while Sweetgreen may very well see its valuation contract if it fails to live up to management’s forward guidance, the stock doesn’t seem to actually be overvalued at this time.

Will Sweetgreen Stock Double?

Analysts forecast that Sweetgreen stock will rise 23.3% to fair value of $33.33 per share, and so is unlikely to double again.

Taking its premium valuation into account, Sweetgreen may not be able to rise as aggressively going forward as it has over the past year.

Analyst price targets suggest an upside of about 19.3% over the coming year, though a combination of continued strong performance and rising investor enthusiasm should lead to better returns.

It’s also worth remembering that Sweetgreen is only now flirting with its IPO price. The stock went public in 2021 at $28 per share.

Today, following multiple years of consistent double-digit revenue growth, the stock trades at just $27.56. Though there’s little doubt that Sweetgreen was overvalued when it went public, this fact does show that the stock likely still has a great deal of room left to run if the company can continue to grow and move closer to profitability.

 Continued expansion of the company’s footprint, steady same-store sales growth and ongoing improvements to net margins will all support progressively higher share prices, though doubling anytime soon is unlikely.

Barring unforeseen obstacles to the company’s continued growth, it’s likely that shareholders who hang around for the long-term will see Sweetgreen gradually double again, though.

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