Shareholders of Sweetgreen would probably like to forget the past six months even happened. The stock dropped 59.5% and now trades at $13.34. This might have investors contemplating their next move.
Is now the time to buy Sweetgreen, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Sweetgreen Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Sweetgreen. Here are three reasons why we avoid SG and a stock we'd rather own.
1. Operating Losses Sound the Alarms
Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.
The restaurant business is tough to succeed in because of its unpredictability, whether it be employees not showing up for work, sudden changes in consumer preferences, or the cost of ingredients skyrocketing thanks to supply shortages.Sweetgreen has been a victim of these challenges over the last two years, and its high expenses have contributed to an average operating margin of negative 16.2%.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the last two years, Sweetgreen’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7.7%, meaning it lit $7.69 of cash on fire for every $100 in revenue.
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 $60.94 million of cash over the last year, and its $329.4 million of debt exceeds the $183.9 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 isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 38.8× forward EV-to-EBITDA (or $13.34 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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