Sweetgreen’s stock price has taken a beating over the past six months, shedding 24.7% of its value and falling to $5.79 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Sweetgreen, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Sweetgreen Will Underperform?

Despite the more favorable entry price, we don't have much confidence in Sweetgreen. Here are three reasons there are better opportunities than SG and a stock we'd rather own.

1. Flat Same-Store Sales Indicate Weak Demand

Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.

Sweetgreen’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Sweetgreen’s margin dropped by 11.5 percentage points over the last year. This decrease came from the higher costs associated with opening more restaurants.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Sweetgreen burned through $119.2 million of cash over the last year, and its $354.5 million of debt exceeds the $89.18 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Sweetgreen’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Sweetgreen until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We see the value of companies helping consumers, but in the case of Sweetgreen, we’re out. After the recent drawdown, the stock trades at 366.2× forward EV-to-EBITDA (or $5.79 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our all-time favorite software stocks.

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