It was an encouraging year for investors. On August 13 S&P500 is up 14% and is trading just 4% below its peak price. The market may still believe that a recession can be avoided.

However, some companies have benefited more from the optimistic sentiment than others. Fast-casual salad supplier Sweet green (SG 1.63%) is in a class of its own. Shares are up 205% this year, a gain that would have tripled your money in less than eight months.

Is it too late to stop this booming Restaurant inventory?

Salads for everyone

Sweetgreen shares have performed remarkably well this year due to their impressive growth. When the company announced its financial results for the fourth quarter of 2023, the first quarter of 2024, and the second quarter of 2024, the share price immediately rose by more than 30% each time, suggesting that it has beaten expectations.

In its most recent quarter (ended June 30), Sweetgreen grew revenue 21% compared to the same period last year, helped in part by strong comparable-store sales growth of 9%.

The other piece of the puzzle for Sweetgreen is its rapid store expansion strategy. In the first 26 weeks of this year, the company has opened 10 new stores, bringing the total to 225. The goal is to open 25 new stores throughout the year.

Wall Street analysts are forecasting a 16% increase in sales for 2024 and 2025. If this forecast proves true, it would be a significant decline compared to previous years.

Unhealthy properties

The market loves success stories, and Sweetgreen is one of them. The stock’s performance tells me that investors expect the tremendous revenue growth to continue for the foreseeable future.

However, investors also need to be aware of the negative characteristics of this company. I can name two main characteristics that are cause for concern.

Sweetgreen remains unprofitable. The second quarter operating loss of $16 million was almost half of the year-ago period. But that tells me the company still has a lot of work to do to get back into the black.

As long as revenue continues to grow and there is some operating leverage, Sweetgreen will be headed in the right direction. However, inflationary pressures on things like food and labor should keep investors’ attention.

When you look at the business landscape, it’s hard to find a more competitive industry than the restaurant industry. There are minimal barriers to entry preventing new restaurants from popping up. And from a consumer perspective, there are no switching costs.

Chipotle Mexican Grill And Starbucks have developed economic trenches in the industry, which strengthens their competitive position against rivals. They have strong brands and economies of scale.

However, I doubt Sweetgreen has a moat at this point. If it can reach a much larger store base, it could fall into that category.

High expectations

At the time of writing, Sweetgreen shares are trading 35% below their all-time high, a milestone reached the day after the company went public in November 2021. Investors could view this as a dip-buying opportunity.

I’m not convinced. In my opinion, this is still an expensive stock. The current price-to-sales ratio of 6 represents a significant 42% premium to the historical average.

Aside from the fact that Sweetgreen is selling at an astronomical price that fully prices in the extreme optimism, it probably has no sustainable competitive advantages. Combine that with the company’s lack of positive earnings and I’m happy to pass on buying the stock at the moment.