Wall Street history is filled with companies that make a big splash only to end up washing out in the end. Two stocks that came public to great fanfare over the past decade are Beyond Meat(NASDAQ: BYND) and Cava(NYSE: CAVA). One probably deserves to be written off as not worth buying, but the other seems to have a potentially bright future ahead -- even though both have seen material stock price declines from their peak levels. Here's the one you might want to buy.
Beyond Meat has never made money
Beyond Meat makes alternative protein products that are supposed to taste like meat. That, of course, is something of an individual taste issue, but when the stock came public there was a lot of demand for the product and the food maker's shares. Large restaurant chains were testing products based on Beyond Meat's food, and people were snapping it up to try because of all the hype around non-meat protein. But as with so many things on Wall Street, the hype didn't last. The stock is now down 95% from its high water mark.
If you are a more aggressive investor, you might think that's an opportunity. But maybe not. For starters, Beyond Meat has never turned a full-year profit. Its earnings have actually worsened in recent years. And while 2023 is likely to be better, earnings-wise, than 2022, red ink is still flowing liberally. It isn't surprising that investors have dumped the stock.
To add insult to injury, management has announced a strategic review because the business' performance has been so bad. There's a real risk that Beyond Meat will end up going out of business if it can't turn sustainably profitable. Perhaps it'll get bought by a larger food maker, but that's not something to count on. The risk/reward balance seems tilted in the wrong direction for investors right now.
Cava is profitable and growing
Cava is a Mediterranean-themed, fast-casual restaurant that has a similar operating format to Chipotle Mexican Grill. That should interest long-term growth investors because Cava ended the third quarter with just 290 restaurants, while Chipotle has over 3,300. Even if Cava only gets to half the size of Chipotle, there's a huge amount of growth potential ahead.
But the early excitement has worn off to some degree, with the stock down by around 30% from its early peak. Don't let that get you down. Unlike Beyond Meat, Cava is making money. Sure, it was just $0.06 per share in the third quarter, but that's way better than the $1.09 that Beyond Meat lost. And Cava has a fairly clear path toward growth as it looks to open new restaurants in the years ahead (at a pace of roughly 15% annual store count growth over the near term).
There's clearly execution risk here as Cava has to successfully open new locations, but so far customers appear to like the concept (same-store sales were a huge 14.1% in the third quarter, suggesting that people are coming back for more after trying Cava). Overall, the picture seems much brighter for Cava than it does for Beyond Meat.
How much risk are you willing to take?
You could buy Beyond Meat, believing that it will eventually turn a sustainable profit and then start to grow its business. But right now, that prospect seems far off, and there's a huge risk that the company might never achieve that goal.
Cava, on the other hand, is both profitable and growing. As it spends on new openings, earnings may be a bit touch and go -- that's normal for a growing restaurant chain. But as long as it continues to expand and has strong same-store sales, the risk/reward balance seems tilted in favor of success.
Of these two young companies, Cava easily looks like a better choice than Beyond Meat today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Beyond Meat and Chipotle Mexican Grill. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
