How about we kick off the week with some good news?
This morning, American fast-casual restaurant chain Cava raised its IPO price range from $17-$19 per share to $19-$20 per share.
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As we reported during Cava’s IPO run, the company shares a number of similarities with other venture-backed, tech-enabled businesses that went public in and around 2021. That means this IPO is not a precise comparable for many startups that are waiting for the IPO market to return. Instead, it will serve to help us track a bit of private capital through its recycling period and catch the current vibe for growth-y companies.
This morning, we’re asking: What is Cava’s new midpoint and maximum valuation given the new price range? When we compare those figures to its recent revenue growth and profit metrics, can we spy any good news for unicorns looking to go public as soon as they can gin up the courage?
So what’s Cava worth at its new IPO price range?
Increasing your IPO pricing range from $17-$19 per share to $19-$20 per share is not that big of a shift. We’ve seen larger changes in the past, especially when the IPO market has been hot. Still, Cava has brought up the floor price for its IPO to its previous ceiling.
That’s great for the company, as it will be able to raise more capital without diluting its shareholders any more than planned.
- At $19 per share, Cava is worth $2.12 billion ($2.16 billion if underwriters purchase their full option).
- At the midpoint of its new range, Cava is worth $2.17 billion ($2.21 billion if underwriters purchase their full option).
- At $20 per share, Cava is worth $2.23 billion ($2.27 billion if underwriters purchase their full option).
The real takeaway from these new prices — compared to our prior calculations — is that Cava is on track to broach the $2 billion valuation mark regardless of where it prices inside of its range. That was not true before, when the lower end of its proposed range saw it sporting a lower price tag.
More importantly, Cava first set a price range that matched our expectations and now has raised it. That’s a solid sign that the IPO market is not completely dead. Indeed, with reasonable pricing, there may even be a little upside for companies going public.
What can we take away?
It appears companies with a clear path to profitability and a solid, if not spectacular, level of revenue growth, can entice public-market investors with their equity. Consider:
- Cava’s revenue rose only 12.8% in FY 2022 compared to FY 2021.
- Cava’s revenue rose 27% in the first quarter ended April 16 from a year earlier.
- Its operating and net losses narrowed to about $2 million in the first quarter from about $20 million in the same period a year earlier.
Accelerating growth and improving profitability is always a nice mix. But Cava’s rate of growth isn’t that impressive compared to what we expect to see from tech-first companies going public. And, the company remains unprofitable — it could target becoming profitable this year, but as of its most recent quarter, that’s not the situation on the ground.
But if Cava had software-like margins and recurring revenue, what would that be worth? We’d imagine a lot more than the 2.8x price/sales multiple it is about to earn (peak fully diluted valuation divided by annualized Q1 revenue).
The situation becomes even more interesting when you consider that Cava is about to trade for a nice premium to Sweetgreen’s own price/sales multiple of 2.37x, though that’s a trailing figure instead of a run-rate calculation. Regardless, a premium over existing public comparables could imply that software unicorns will be able to best today’s norms when they price their own IPOs. That would be welcome indeed.
We won’t know for sure, though, until someone gets their courage up, but we’ll just have to wait and see.
