The Second Coming of Chipotle, or an (Extremely) Overpriced Bowl

I “reached peak Cava” on July 5, 2017 - and ate Cava nearly every day during my time at AARP. Although my only perk as a “Connoisseur” (the highest loyalty tier) was a Cava water bottle, I enjoyed the food and convenience. And, I was happy to see Cava’s stock double in its first day of trading to a $4.7B market cap. 

Several friends backed Cava at various stages, and it’s great to see the local ecosystem notch a notable win. However, when one friend (longtime Cava investor) asked me if he should sell (after the lockup period), I didn’t hesitate. I told him the valuation made no sense, and if the price held, he should dump as much stock as possible. 

I was clearly wrong - as Cava has more than doubled to $111/share. Although my high school/college value investing newsletter (“The Conscious Investor”) landed me my freshman year internship at John Hancock, I was not a good trader (or equity investor). I would often flag great buying opportunities for others, and make the wrong calls with my own money. As a result, I often lost money with my own stock trades. Even to this day, I’m extremely hesitant to buy stocks (or even ETFs) - and prefer to maintain a very heavy allocation to venture/startups. I know I can deliver big returns as an angel…and know I have plenty of limitations around equity investments. 

So, you may be wondering why I’m even attempting to comment on an individual stock. Even with lots of firsthand knowledge on Cava, and their products. However, I’m not advocating anyone to buy, or short Cava. 

Cava currently trades at about 14x TTM revenue, and 56x TTM gross profit. Although Cava is actually profitable, its TTM pre-tax income is about .4% of its market cap (a ~236x multiple). No one will price Cava off income now - and most investors likely see Cava as a growth stock. However, Cava has also shrunk a bit over the last 2 quarters, and is only projecting 24% growth in 2025. Chipotle is only projecting 13% growth in 2025…but they’re 12x Cava’s size and 29x its pre-tax income. They’re also priced at 6.1x Cava’s enterprise value - and have almost doubled top-line since 2020. 

On the surface of things, Cava feels extraordinarily expensive. However, a possible future growth story (into the next Chipotle), a generally good product, and a very friendly macro/market environment make it a dangerous short. Since I will not trade in either direction myself, I’ll finally make the tie-in to venture investing:

Venture deals are all 1 of 1s to some extent, and somewhat unique snowflakes. There are countless factors that always seem to vary - from the founding team to sales/marketing strategy and products themselves. Although many VCs are cut from the same cloth, valuation is an art form and a function of many interrelated factors. So, it’s not a surprise that prices can be wildly different for similar companies at similar stages in similar industries with similar client bases…even at similar periods of time. I regularly see one VC pay a $15m pre for a deal, and a different VC pay $6m for basically the same deal (in some cases with the cheaper deal having better founding teams and stronger scaling potential). While pricing at the very late stages tends to be much more consistent (there are also far fewer companies), earlier stage (pre-seed to A) is still the wild west. 

Uncovering truly asymmetric information in a high access, high information market like the public equity markets is very difficult (and valuable). Most investors have the same access and same information sources (hedge funds will pay small fortunes for truly unique, fully legal edges or advantages). However, early-stage venture investing is a fairly opaque, limited access industry. The hot west coast rounds are competitive feeding frenzies - and a game of currying favor/access to the deals. However, outside of the silicon valley shuffle, it can be a game of discovery and pricing asymmetry. 

Picking the right deal over the right price is still critical - even a perfectly priced deal can fail. Startups need to scale, founders need to know how to sell and drive the right exit, and boards need to help guide leadership teams through all market environments. However, my best deals have usually been ones with the right teams, good timing, and generally good prices. In most cases, the companies have been priced well below peer companies, with the same strong (or stronger) metrics and founder intangibles. Having multiple comps also helps shed light on the market environment, funding environment, and competitive environment. 

I frequently get asked why I maintain such a large fund network (for deal and diligence sharing). And, there are three key reasons - to maintain local intelligence across dozens of different cities, timely notifications of active deals, and visibility on as many recent comps as possible. While I do not share any details of the comparable deals with other founders, I definitely use them in my own diligence. I will also continue to track these deals as closely as I can for comparative intel around industry dynamics, and progress vs. my own portfolio companies (informing my re-investment decisions). 

Although I was an early Cava adopter, and regular customer - I have completely avoided the stock. Based on my equity investing track record, I’ll continue to steer clear of a short or long position. However, I will continue to devour as much information as I can with venture deals - and continue to lean on my sourcing/discovery network. I know I will never have any remote advantage with equity investments, but I will meticulously maintain an edge with venture investments.