What a fantastic six months it’s been for Sweetgreen. Shares of the company have skyrocketed 44.8%, hitting $9.60. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Sweetgreen, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Sweetgreen Will Underperform?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Sweetgreen. Here are three reasons there are better opportunities than SG and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.
Sweetgreen’s demand has been shrinking over the last two years as its same-store sales have averaged 3.2% annual declines.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Sweetgreen’s margin dropped by 8.7 percentage points over the last year. This decrease came from the higher costs associated with opening more restaurants.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Sweetgreen burned through $118.9 million of cash over the last year, and its $356.1 million of debt exceeds the $156.8 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Sweetgreen’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Sweetgreen until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Sweetgreen doesn’t pass our quality test. Following the recent surge, the stock trades at 182.9× forward EV-to-EBITDA (or $9.60 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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