CAVA Group's Impressive Debut Shows Investor Appeal for IPOs is Growing

Conditions for the IPO market are still far from normal, but green shoots continue to emerge, hinting that brighter days may be on the horizon. The final positive signs emerged earlier this morning when CAVA Group (CAVA) placed 14.4 million shares at $22, above its upwardly revised $19-$20 price range. Initially, the deal was expected to be in the range of $17 to $19. Overall, the deal attracted total gross proceeds of $316.8 million, nearly $58 million more than the company had expected based on the midpoint of the initial price range.

Strong CAVA prices follow good performance from Kenvue (KVUE), Johnson & Johnson (JNJ) consumer health by-product, and Structure Therapeutics (GPCR), Nextracker (NXT) and Skyward Specialty Insurance (SKWD).

However, there are a few highlights that make the CAVA IPO stand out , making its results particularly encouraging for the IPO market.

First, the company is more of a growth story that also operates in the highly cyclical consumer discretionary sector. This combination of traits was almost non-existent in the IPO market, at least not for companies of any real content. For the most part, the larger deals in the IPO market have been centered around more defensive sectors and industries such as consumer goods, healthcare, insurance, utilities, and some technology names.

Second, CAVA's impressive opening earnings are another sign that investors are feeling much more confident and willing to take on risk. Specifically, the stock opened for trading on the NYSE at $42 , representing a stunning 91% open gain. The huge rise reminds us of the boom days of the IPO market in 2021, with almost 400 trades launched, many of which opened for trading at significant profits.

With such a huge profit at the opening, the stock just became very expensive. CAVA's market capitalization currently exceeds $5.3bn, which equates to a P/S ratio of around 9.5x. CAVA is growing rapidly and the same 28.4% growth in restaurant sales in the sixteen weeks ending April 16, 2023 is outstanding. The company is also approaching profitability with an operating loss of just ($2.3) million over the same period.

Strong growth and growth potential — CAVA estimates there could be more than 1,000 restaurants in the US by 2032 — support the higher valuation; but at these levels, the risk-reward ratio becomes much less attractive. While we generally like CAVA and believe its Mediterranean “best for you” menu is trending, we would be more comfortable waiting for a better entry point  after the initial IPO investors lock in their profits.