On Tuesday, Morgan Stanley adjusted its stance on Sweetgreen Inc (NYSE: SG), moving the company's stock rating from Underweight to Equalweight and setting a new price target of $25.00. The firm shifted its outlook due to a reassessment of the company's near-term growth indicators, automation path, and long-term potential for unit expansion and profitability.
The analyst noted that Sweetgreen remains a strong brand within a trending category, despite ongoing debates about the total addressable market (TAM) and profitability. The company's general and administrative expenses are expected to be offset by profits and cash flow derived from unit expansion over time.
Recent developments have been more favorable than anticipated, contributing to the decision to upgrade the stock. The introduction of Infinite Kitchen, Sweetgreen's new initiative, is predicted to have a positive impact in the near term as it rolls out further. However, questions about the consistency of its reliability, cost, and applicability, as well as its role in expanding TAM, remain for the long term.
Major key performance indicators (KPIs) for Sweetgreen have surpassed expectations. While not outperforming all peers, the company has potential menu and operations catalysts that could continue to drive success even as the industry faces a slowdown.
The reassessment follows a recent devaluation of Sweetgreen's stock over the past month, bringing it closer to a level that aligns with Morgan Stanley's current projections.
The firm believes the risk-reward balance is now more even based on these numbers, which are considered more conservative than some bullish expectations for margins, unit counts, total profitability, and average unit volumes (AUVs) over the next five to ten years, a period critical for valuing the stock. The new price target reflects refined estimates and a higher assigned multiple.
In other recent news, Sweetgreen Inc. has reported notable developments. The company's Q1 sales saw a 26% increase, reaching $157.9 million, driven by a 5% rise in same-store sales. Despite this growth, Sweetgreen reported a net loss of $26.1 million for the quarter, an improvement from the previous year's loss. Digital sales constituted a significant 59% of the total revenue, indicating a robust online presence.
At the company's Annual Meeting of Stockholders, shareholders re-elected all nine director nominees, ratified the appointment of Deloitte & Touche LLP as the independent accounting firm for the upcoming fiscal year, and approved executive compensation.
Goldman Sachs initiated coverage on Sweetgreen with a Buy rating, anticipating the company's strategic expansion and product innovation to drive growth.
Sweetgreen also plans to open 23-27 new locations in 2024 and foresees a unit growth of 15% in 2025, accelerating to 20% in 2026.
InvestingPro Insights
Following Morgan Stanley's rating update for Sweetgreen Inc (NYSE: SG), real-time metrics from InvestingPro reveal a nuanced picture of the company's financial health and market performance. With a market capitalization of $2.95 billion, Sweetgreen's stock stands out for its high volatility, as evidenced by a 6.72% return in just one week, yet a significant 17.41% drop over the past month. This aligns with the InvestingPro Tips that suggest the stock generally trades with high price volatility and has fared poorly over the last month.
Despite a notable 25.23% revenue growth in the last twelve months as of Q1 2024, the company's struggles with profitability are apparent, with a negative P/E ratio of -34.34 and analysts not anticipating profitability this year. Sweetgreen's gross profit margin stands at 18.61%, highlighting the challenges it faces in terms of weak gross profit margins, which could be a concern for investors looking for robust financial performance.
Investors considering a stake in Sweetgreen may find additional insights through InvestingPro Tips that include a total of 14 tips, offering a deeper dive into the company's financials and market behavior. For those interested in a more comprehensive analysis, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, which provides access to a wealth of investment tools and data.
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