Investing in Sweetgreen (NYSE:SG) is a speculative venture, and it’s dangerous to expect huge profits in 2024. There’s no denying that Sweetgreen recently posted great financial results, putting the stock in the green today. However, I am neutral on SG stock, as the risk-to-reward scenario isn’t favorable at the current share price.
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Sweetgreen is a restaurant chain that serves salads and other health-focused offerings. It mainly appeals to vegetarians – but as we’ll discuss in a moment, Sweetgreen is making a controversial move that could draw the ire of some vegetarian and vegan customers.
Furthermore, even though SG stock is in rally mode, prudent investors shouldn’t assume that Sweetgreen’s financial results are perfect in every way. Research will be the key to success as a Sweetgreen stock investor, and at the end of the day, you might choose not to invest at all.
A Not-So-Green Addition to Sweetgreen’s Menu
First things first. Before we talk about Sweetgreen’s financials, there’s an event that may stir up some trouble for Sweetgreen. You might be shocked to find out what menu item the company is adding now.
A still-fresh press release disclosed that Sweetgreen is adding caramelized garlic steak to its menu on a nationwide basis. This is controversial for a couple of reasons.
For one thing, the company’s vegetarian and vegan patrons won’t necessarily want to see and smell steak in Sweetgreen restaurants. After all, a major part of Sweetgreen’s appeal is that it’s not a meat-centered restaurant like Fridays or Chili’s.
Moreover, some customers may object to the environmental implications of serving steak. The Associated Press reported that Sweetgreen “says it will be carbon neutral by 2027,” but at the same time, beef production is “the largest agricultural source of greenhouse gases globally, emitting massive amounts of methane into the atmosphere, and requires extensive land use,” according to the Food and Agriculture Organization of the United Nations.
Sweetgreen might counter this obvious problem with chatter about “regenerative farming” and “carbon offsets.” A much simpler approach, however, would be to stick to the vegetable-based offerings that made Sweetgreen popular in the first place.
Maybe the skeptics will be proven wrong, and Sweetgreen’s steak meals will sell like hot cakes. That remains to be seen, though, so it makes sense to watch and wait rather than hastily jump into SG stock right now.
Sweetgreen Stock Surges, But There’s a Problem
You might not be too concerned about steak menu items if you’re enchanted with Sweetgreen stock’s sharp rally. The stock is up about 34% today and has basically tripled since the beginning of the year.
It’s not difficult to identify the catalyst for Friday’s share-price surge. Sweetgreen just released its first-quarter Fiscal Year 2024 results, and I can’t deny that the company demonstrated improvement in key areas.
First of all, Sweetgreen’s same-store sales increased by 5% year-over-year. Also, the company’s adjusted EBITDA turned positive, from -$6.7 million in the year-earlier quarter to $0.1 million in Q1 FY2024. On that topic, Sweetgreen CEO Jonathan Neman boasted, “We delivered positive Adjusted EBITDA during a traditionally slower first quarter.”
So far, so good, but should SG stock really be 200% higher than it was in January? Let’s get to the essential top-line and bottom-line results and see if Sweetgreen can justify the share-price rally.
In Fiscal Year 2024’s first quarter, Sweetgreen generated total revenue of $157.9 million, up 26% year-over-year. That’s impressive sales growth, but did Sweetgreen also improve its bottom line?
The answer is yes, but with a caveat. Sweetgreen reported a net loss of $26.1 million and a net loss margin of -17% for Q1 FY2024. Granted, that’s better than the company’s net loss of $33.7 million and net margin of -27% from the year-earlier quarter.
Still, it’s expensive to run a niche-focused start-up restaurant chain. Sweetgreen’s first-quarter Fiscal Year 2024 expenses increased year-over-year in multiple categories, ranging from general and administrative to labor, occupancy, as well as food, beverage, and packaging costs.
Going forward, it’s a question of whether Sweetgreen can continue to grow its revenue at such a rapid pace. That’s easier said than done. It would also help if Sweetgreen could identify ways to reduce its expenditures in multiple categories.
Is Sweetgreen Stock a Buy, According to Analysts?
On TipRanks, SG comes in as a Moderate Buy based on five Buys, two Holds, and one Sell rating assigned by analysts in the past three months. The average Sweetgreen stock price target is $21.63, implying 31.3% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SG stock, the most accurate analyst covering the stock (on a one-year timeframe) is Christopher Carril of RBC Capital, with an average return of 28.08% per rating and a 53% success rate. Click on the image below to learn more.
Conclusion: Should You Consider Sweetgreen Stock?
Some customers might like Sweetgreen’s steak menu items, but others may find the presence of meat off-putting. Still, the market doesn’t seem very concerned, as Sweetgreen looks unstoppable at this point.
That’s what bothers me, though. Vertical share price moves have to be justified sooner or later. Otherwise, the stock will be vulnerable to a steep pullback. Consequently, while Sweetgreen appears to be improving in some important areas, I would not currently consider buying SG stock, as it just ran too high too quickly, and the company is still unprofitable.
