Sweet green (SG 7.39%) has taken investors on a wild ride since its IPO on November 18, 2021. The fast-casual restaurant chain went public at $28 and opened at $52 before closing at a record high of $53 the next day. At the time, the market was dazzled by its rapid growth. The buying spree in growth stocks amplified those gains.

But by March 27, 2023, Sweetgreen stock had fallen to its all-time low of $6.31. Bulls retreated as store sales growth slowed, losses widened, and rising interest rates depressed the company’s valuations. Inflation also rocked the restaurant sector as investors worried about higher raw material and labor costs.

Image source: Getty Images.

But since then, Sweetgreen’s stock has risen nearly six-fold and trades at about $37. This comeback has been fueled by stabilizing store sales growth, rising margins and narrowing losses. So is now the right time to buy, sell or hold this stock?

Conquering a niche in the fast-casual salad sector

Sweetgreen sells custom salads and hot bowls. The company was founded in 2006 by three Georgetown University graduates: Nicolas Jammet, Nathaniel Ru and Jonathan Neman. The following year, the company opened its first restaurant in Washington, DC

Sweetgreen had attracted a lot of capital as a startup and already had 130 locations in 13 states at the time of its IPO. It also served 1.35 million customers and generated more than two-thirds of its revenue through its digital channels. It owns and operates all of its stores itself, rather than franchising them.

Sweetgreen’s fast-casual approach to selling healthier foods, its rapid expansion and its robust digital sales likely reminded investors of ChipotleThis is probably why Sweetgreen’s shares initially skyrocketed after its IPO.

How fast does Sweetgreen grow?

Sweetgreen experienced a downturn in 2020 as the outbreak of the pandemic forced the company to temporarily close its restaurants. But over the next three years, the company continued to open new stores while sales at existing stores continued to grow.

However, store sales slowed, average unit volume (AUV) growth stagnated, and the share of digital orders gradually declined. This slowdown sparked fears that Sweetgreen’s business was maturing and could enter a vicious cycle in which the company increased sales through new store openings while store sales declined.

Data source: Sweetgreen. *Adjusted for temporary COVID-19 closures in 2020.

However, for 2024, Sweetgreen expects like-for-like sales to increase 5% to 7% as it opens 24 to 26 new locations. Total sales are expected to increase 15% to 16% to $670 million to $680 million. This stable forecast suggests there is still plenty of room for growth.

But can Sweetgreen ever make a profit?

Sweetgreen is not yet profitable, but restaurant-level profit, operating profit, net income and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins have all improved significantly since the IPO.

Data source: Sweetgreen.

Like Chipotle, Sweetgreen raised its menu prices to offset increased raw material and labor costs, reduced the number of administrative and support staff, and automated more of its kitchens with salad robots.

For 2024, the company expects restaurant-level profit margins to increase to 19 to 20 percent and positive adjusted EBITDA of $16 to $19 million. This would correspond to an adjusted EBITDA margin of about 3 percent. Analysts expect the company to reduce its net loss to $56 million.

From 2023 to 2026, analysts expect Sweetgreen’s revenue to grow at a compound annual growth rate (CAGR) of 17%. They also expect adjusted EBITDA to more than triple from 2024 to 2026 as the company continues to narrow its net losses. The company ended the second quarter of 2024 with $245 million in cash and equivalents, and its manageable debt-to-equity ratio of 0.8 gives it some room to take on more debt as it expands.

Sweetgreen has an enterprise value of $4.1 billion, making it reasonable (but not a bargain) at 6 times this year’s sales. Chipotle, which is growing at a comparable rate and generating stable earnings, also trades at 6 times this year’s sales.

Is it the right time to buy, sell or keep Sweetgreen?

As long as Sweetgreen’s sales continue to grow at its existing stores, the company continues to open new stores, and its margins continue to expand, it should be a good stock to buy and hold for the next few years. However, I would gradually add to my position over a few quarters, as the stock still isn’t cheap — and the company could stumble if it fails to meet just one of those three criteria.