Motley Fool Money - Is CAVA a Palate Pleaser?

Episode Date: June 12, 2025

Two Fools duel over CAVA’s prospects. Is there enough tasty growth to support a spicy valuation? Tim Beyers and Rick Munarriz discuss: - Oracle’s AI-fueled earnings. - Dave & Busters and Chewy: who had the better earnings? - All about the Chime IPO - Plus … Dueling Fools returns! Companies discussed: CAVA, ORCL, PLAY, CHWY, CHYM Host: Tim Beyers Guests: Rick Munarriz Engineer: Dan Boyd Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

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pallet pleaser for today's investors? We duel, you decide. This is Motley Fool Money. I'm Tim Byers, and with me today is longtime fool and rule breakers colleague Rick Binares. Rick, how you feeling today? Are you caffeinated? I am not caffeinated, but I will be by the time people are listening to this. How's that for a weird promise? I like it. All right. Today we're talking about Oracle's AI-fueled earnings, good reports from David Buster's Chewy, and the child. IPEO, you may not have heard of that. We'll talk about it in a bit. We'll also duel over Kava's prospects and take you down into the Wayback Machine for a big moment in rule breakers history. But first, let's hit some headlines here. President Trump rattling the markets with some

mixed messages on tariffs, talking tough, while his Treasury Secretary hints at some delays. The clock's ticking here, so stay tuned. This will get a little bit interesting. And Vidia, meanwhile, is going to go big in Europe, announcing. its first AI cloud for industries and plans for 20 AI factories, CEO Jensen Wong, saying that quantum computing is nearing liftoff. So that should be interesting. Nuclear startup, Oklo's search 29% on new Air Force Microreactor Project, then probably filed to raise $400 million. So there's a lot going on here. And then heartbreakingly, Rick, Boeing shares fell over 7% after a 787 Dreamliner. crashed in India. It killed more than 200 people. It's the first full loss of that model and adds

pressure ahead of next week's Paris air show. So not great there. Our hearts go out to all of the victims and all of their families. We're really sorry for your loss. But let's get into the rundown here. And we've got three big stories and then a quickie that we're going to turn around on. Let's start with Oracle. Rick up over 13 percent. on AI demand. So I'm going to ask for a reaction here, but let me give you the impetus behind this, triple-digit growth in data center infrastructure, CAP-X, more than tripled year-over-year. So here's the question. Can AI and Oracle's position as the Switzerland of Data Center infrastructure fuel, you know, what really is a hope for a year of outsized demand? Now, for a company of Oracle's

size. Outsized demand means like revenue growth on a all-in basis of about 15%, which they're getting. So basic question for you here, Rick. I know you don't know Oracle super well, but what is your expectation for AI demand? Is this the kind of tailwind that Oracle can surf for a while? I mean, look, Larry Ellison like to compete with it. He likes regatta. Maybe he's got the tailwinds at his back. Yes, yes. It's good sailing for all these AI stocks. And now Oracle is apparently an AI stock, too, which is, again, it's great. Obviously, the generative AI demand is just in its infancy right now. And it's in its controversy and its infancy, but you're seeing right now where companies that are benefiting in for Oracle,

maybe it won't move the needle as much as it would for, let's say, in Nvidia, of course, or a core weave or something like that. But I do think in this case, it's something to get excited about Oracle with. And I think, obviously, yeah, I think there's enough demand to feed a lot of players in here, the people that are actually building the infrastructure, handling the software, and of course, putting out the actual product. And the users are not complaining. You know, outside of copyright restrictions from some of the major studios out there this week. But it is a kind of thing where, yeah, I think Oracle will stand the benefit. And again, it won't be, it's not going to pick up growth to NVIDIA levels, but it's definitely something that can pick it up from its current pace. Yeah, I mean, triple-digit growth in that data center infrastructure business is massive.

Number two here. Let's get to two that you know very well here from the Rule Breakers scorecard. Dave and Busters and Chewy. Two reports, a little bit different. Dave and Buster's actual results were, I think we could say, man, but the outlook was fantastic. And Chewy crushed to the auto ship numbers. So here's question, Rick, who had the better report? Who are you putting on your watch list? Yeah, so to me, the biggest, so Chewy's report obviously was the better report. But Dave and Busters, this is a thing about the stock market. Chewis had strong growth. You mentioned the auto ship numbers. More than 82 percent of their orders are now auto ship on Chewy, which is pretty much the equivalent of annual recurring revenue run rate, even though these contracts are very easy to cancel,

obviously. It's not that, it's not like it is for the software industry, but it's steady, its growth. And more importantly, their customer base is growing again. It was contracting from 2021 to 2023, from 20.7 million customers, active customers, to 20.1 million at the start of this year, and now we're seeing it grew up. Sorry, two years ago at the end of 2024, then we saw it grow to $20.5 million, and now $20.7 million. It's back to where it was three years ago, right when the pet adoptions were at their post-pandemic peak. So that's great for Chewy, but the stock still took a 10% hit. I think mostly, I didn't see a lot of negative in the report, but the stock had almost doubled over the past year, so it was just kind of like, okay, we expected better.

Whereas Dave and Busters, the report was terrible. It wasn't even that it wasn't great. It was a bad report. Comp's down 8.3 percent, sales declining. A lot of things, except what excited investors are why the stock was up 17 percent on Wednesday was that they said, hey, so far year-to-date, comps are only down 2.2 percent. So investors are cheering a much smaller negative growth in the comps level than the great positive report, but that's enough. So it's definitely enough to see that Dave and Busters are sort of possibly turning things around. They've remod a lot of stores are doing a lot of things. So, yeah, the market, obviously is not the Dave and Buster story. A story was a lot better for investors because that stock has basically been hit harder

the last couple of years. But I do think the true report was a lot better. But to me, as an investor, I think Dave Buster presents possibly a better value because it's been hit so hard. But it was definitely not the kind of report that merited a 17% increase until we see the turnaround fully turnaround. More proof that expectations mean everything. All right. Number three, quickly, chime IPO. Tell me about this business, Rick. What excites you about it? Yeah. So this is a business that it's a fintech platform, and it's growing rapidly, especially with

young users. There's 8.6 million members. There was $121 billion transactions on the platform over the past year. They do a little bit of everything. So it's a digital bank, like a Sophie, but also PayPal, Venmo. It's all that sort of wrapped up, a little lending in their consumer lending, credit building. It does all these tools. There's a community feature to it.

And on the prospectus, and again, this is the funny thing. I don't really take it seriously. In the prospectus, one item there says that 75% of members say they will be with time for life. And I assure you, they will not be there for life because we know things change dramatically. But the fact that they put this in the perspectives was almost comical, but it is sticky. Revenue is up 31% last year, accelerating with 27% the year before, doing a lot of cool things. As we're recording this, the stock is expected to go public at 27 as the price was underwitted. It wouldn't surprise me if it does better than that, but it's not open yet. you and I do not have a clear view on how we'll close at the end of the day. But this is a company

hitting the market 10, 11, $12 billion market cap. It could probably be very different by the time the market closes and most of you're listening to me. I mean, who knew that chime ticker C-H-Y-M, C-H-Y-M? Who knew your time account came with a pre-nup? I didn't know that, Rick. All right. Let's take a quick break. Up next, Dueling Fools. These days I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly why I love Quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense.

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love it. And you will. Now available in Canada, too. Don't keep selling. settling for clothes that don't last. Go to QINCE.com slash Motley for free shipping and 365 day returns. Quince.com slash Motley. All right, we're back. Tim Byers here with Rick Bionares. We call this segment dueling fools. For those of you have been around for a while, we love this idea where we take both sides of an investing thesis and we debate the merits and then you decide. We want you to listen to our arguments on Kava, arts, delicious entrees and sauces worth the premium valuation. Leave us a comment.

Let us know whether you're voting bull or voting bear. But Rick, we always start with the bear argument. So you're up first. Give us the bear thesis for Kappa. Yeah, so I'm a fan of Kappa. I'm a customer. I'm long-term bullish. However, I don't think that it's just that the fast casual chain's crazy

Feta is the only thing that isn't a little bit local here right now. Let's start with the valuation. This might not be the right investment for you if you have a fear of heights. Kava is trading for 128 times this year's earnings and 107 times next year's profit target. And this is after the stock has been cut by more than half since peaking seven months ago. Its revenue and free cash flow multiples are also as wide as its corporate moniker is narrow. So with the shares down 55% from their November all-time highs, you're going to be tempted to buy on the dip. And as a fan of their food, I can assure you, Kava has some pretty good dips. But even after the stock getting sliced by more than half, Kava has still nearly quadrupled since going public two years ago.

So it's been a big winner for investors over the long haul. At the time of the IPO, Tim and I were excited about the opportunities. Full disclosure, we still are. But a part of our bullish thesis was that Kava has been selling its dips, sauces, and dressings through retailers for years. You can go to Whole Foods and pick up some of its spicy hummus or lemon herb tahini. The bullish argument was that the chain, as the chain expanded, brand awareness would grow, and consumer package goods would explode. Well, CPG sales are less than 1% of the revenue mix right now, so that really hasn't happened. Kava has some decent tailwinds.

Its target audience reaches a young and somewhat affluent audience that will have several decades of wolfing down spicy lamb meatball bowls and crispy falafel pitas. Companies calling employees back to the office is another positive catalyst. This chain thrives during the workplace lunch hour. There are also some headwinds. And like the stock, a meal at Kava isn't cheap compared to most quick service concepts. It's definitely vulnerable to a softening economy. Let's talk about cannibalization, an admittedly unappetizing term when talking about food. But when Kava opened in Indiana earlier this year, it marked the first time that the concept

has more stores in more than half of the states right now. Eventually, expansion will come to the point that opening a new location will come at the expense of Kava's older nearby locations. The chain success is inspiring Other concepts to cash in on the growing interest in the healthy but flavorful merits of Mediterranean cuisine. And imitation can often be the sincerest form of battery. Now, Kava, the company, like its menu, is certainly worth a market premium. Comps wrote an impressive 10.8% in its latest fiscal quarter. This was a period in many of the other restaurant operators, including some that are in our rule breakers universe, proved mortal.

This is a great restaurant chain. I love culinary spalunking as a Kava dweller, but there are other quality concepts trading at cheaper valuations. in the paraphrased, lyrical genius of the who, you fetta, you bet. I mean, I love it. Don't get me wrong, Rick. I am always here for a little wordplay. You never know what you're going to get. And so I do love that.

And I love some Kava. Let's talk about the bull argument here. Here's just a few reasons why you should be bullish on Kava today. I'm going to give you a number here, Rick. Actually, I'm going to give you two numbers. Net income rose 10x. from fiscal 2023 to 2024, 13 million to 130 million. Let me say that again. That's 10x, Rick, 10x. So those are the sort of heights that I love. You said this is a company that has earned

its premium valuation or that it has a premium valuation. I say it's fully earned that premium valuation. This is also a company that does it right when it comes to expanding its menu and maximizing every square foot. Like you said, comps were up 10.8%. in the most recent quarter. I think part of that, Rick, has to do with how Kava thinks about maximizing its square footage in each of the stores. So, for example, in some stores, they have set aside catering business. They also have it set aside for maximizing delivery. They also do some work, putting their sauces and crazy Feta and other things into grocery stores. So every Kava is doing much more than serving you when you walk through the door. But let's just say,

also talk team. Co-founders Ted Cineristos and Brett Schulman still run this business day to day, and they are dreaming up new concepts. Ted is still the chief concept officer. They dream up new concepts, new expansions, including these purpose-built kitchens that we're talking about, almost ghost kitchens for improving the delivery and catering business. And while it might not seem like much, Rick, the roughly 36 million in free cash flow, COVID generated over the trailing 12 months. And that is after everything. You strip out all the stock-based compensation. You also strip out some pretty heavy capital expenditures, and you still get that 36 million

in cash left over. Got a good balance sheet. They've got plenty of money to keep reinvesting in this business. And there's less than 400 Kava restaurants, 400 locations today. I don't think it would be at all surprising. Rick, to see that location total 5x or more over the next 10 to 15 years. And if that's right, the price you see in Kava today, you're going to long for 10 years from now. So there's my bull argument.

Please go ahead and leave us a comment here at Motley Full Money to let us know what you think. We would love to hear whether or not. And if you have a bear argument or you have a bull argument, join us on the discussion boards, leave a comment here to the podcast and let us know what you think. Our last and final section today, we're going to go back into the Wayback Machine for a moment in Rule Breakers history and the origin of the spiffy pop. Who knows what a spiffy pop is? So a spiffy pop is when a stock rises as much or more in a single day than the value

of its cost basis. And the first Spiffy Pop in the Rule Breakers universe, the stock that actually gave rise to the term Spiffy Pop was a quantitative. Rick, do you remember when we sold this stock? Yes, and I remember it was your recommendation to David, and you got it on the scorecard. And yeah, it was the kind of thing where we found early on that when you're picking these disruptive growth stocks, other companies are going to want them. And in this case, Microsoft, which is show no lack of appetite in buying a potential threat or a potential opportunity. Yeah, I remember vividly when it happened. And it was disappointing to us because I think a quantum on its own could have probably still continued to be a market beater today, given the way trends and everything

happened with everything. But yeah, I remember vividly. So we recommended this. David recommended this in January of 2007. And by January, I'm sorry, June 20th of 2000. 2007, 18 years ago, I can't believe it's been 18 years, Rick. Microsoft made a bid to buy out a quantitative on a spiffy pop. And in six months, we had a 151% return. That is not bad. It doesn't happen often, fools. But in rule breakers, it does happen and it will happen again. So that's it. Thank you for being here on Motley Fool Money. We appreciate you here. As always, people people in the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against.

So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisers are sponsored content provided for informational purposes only. See our full advertising disclosure. Please check out our show notes. For Rick Vienares, I'm Tim Byers. We'll see you again tomorrow. Rick, thanks for being here.

You know,