🎙️ The Flavors of Life

The stock market has been soaring, fueled by the Magnificent Seven — notably Nvidia, Microsoft, Apple, and Amazon.

In May alone, the tech giants collectively added $1.4 trillion to the market capitalization of the S&P 500 index, surpassing the combined contributions of 296 other stocks during the same period. (Nvidia's contribution accounted for more than half of this remarkable rise.)

As one can expect, these companies are minting millionaires through robust salaries and large stock plans, attracting top talent and further fueling their growth. The graphic below showcases their median pay.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Behind Cava’s 300% surge

• The changing tastes of a warming world

This, and more, in just 5 minutes to read.

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In The News

🥘 Cava is Worth $33 Million per Restaurant After Blistering Debut

Among the IPOs of the past year, one newcomer has captured Wall Street's imagination like no other: Cava.

Dubbed the "Mediterranean Chipotle,” the fast-casual restaurant chain has soared over 300% since last fall. Its market cap is now over $10 billion.

• That equates to about $33 million per restaurant, dwarfing even Chipotle’s $3 million per restaurant valuation when it hit the one-year public mark in 2007.
  

• But like any quick rally, Cava is causing angst among some bullish analysts, citing its "unprecedented" per-restaurant valuation despite average annual revenue below $3 million per location. 

Breakneck growth: While most investors remain willing to accept such lofty valuations, betting on Cava's potential to emulate Chipotle's growth trajectory, some insiders have cashed out portions of their holdings. Some warn that the Chipotle comparison is a double-edged sword.

• "Everyone makes the comparison to Chipotle. If you make that comparison, you have to compare Cava to early Chipotle, which was a similar story. It opened a lot of new stores, it grew quickly, but the operations and execution in late 2015 didn't work that well."
  

• Chipotle's rapid expansion led to food safety issues that tanked its stock in 2015, taking two years to recover. While Cava has avoided such pitfalls so far, opening over 50 locations last year without notable quality lapses, breakneck growth can breed operational hiccups.

Honeymoon period: One analyst noted, "Investors are willing to pay a premium for these growth-oriented concepts... because there's only a handful of restaurants that are providing growth." 

For now, Wall Street's love affair with the "Mediterranean Chipotle" goes on, but history suggests the honeymoon could sour if Cava stumbles in any way. 

Why it matters:

Cava’s rise underscores the renewed appetite for trendy stocks in the revitalized global IPO market. 

Cava has aggressive expansion plans, aiming to grow from its current 323 locations to 1,000 restaurants within the next decade. That’s driven much of the investor euphoria: Cava is seen as one of the few fast-casual chains with a long runway for expansion.

• But the pace of growth also carries operational risks if not executed properly, as Chipotle experienced with food safety issues during its own breakneck expansion phase about a decade ago. 

Valuation concerns: At a valuation over $10 billion, Cava is trading at a premium even compared to established players like Chipotle. But some believe it’s justified given Cava's growth potential and status as a trendy, in-demand brand.

• They also point out that Mediterranean cuisine differentiates Cava from other fast-casual leaders like Chipotle, Sweetgreen, and Panera Bread.

Bottom line: Cava will need to keep executing on all cylinders, fend off competition, and rapidly expand its footprint to live up to its billing as the next Chipotle-like success story.

Read more

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☕ Climate Change Comes for the Finer Things in Life

As the planet continues to warm, extreme weather is upending the production of some of life's great culinary comforts: wine, olive oil, coffee, and cocoa. 

Many of these crops are concentrated in just a few regions, so unusual weather (mostly heat waves, droughts, and floods) can send shockwaves through global supply and pricing dynamics.  

• Cocoa: Chocolate fanatics know that cocoa prices hit records this year after heat waves and untimely rain in West Africa.
  

• Coffee: A severe drought in Vietnam, the world's No. 2 coffee producer, pushed robusta coffee prices to 45-year highs.
  

• Wine: Heavy rain in Italy has caused grape-devouring mildew, sinking global wine production to its lowest since 1961. 

Getting creative: The disruptions force chefs, farmers, and producers to get creative to preserve beloved tastes and traditions. One Italian chef told The Wall Street Journal that for some dishes, real extra virgin olive oil cannot be substituted, adding concern to his livelihood. 

• "It's one of the flavors of life," he said.

Case study: Joe Shaw used to make his salads with a light dressing of balsamic vinegar, lemon juice, and olive oil. Those days are gone. The 28-year-old exhibition assistant from London has been forced to abandon olive oil due to skyrocketing prices caused by drought and heat waves baking olive groves around the Mediterranean.

• "It does feel a little apocalyptic," Shaw said. "You remember the days when you could have olive oil."
  

• Likewise, a coffee grower in India whose family has grown coffee for over 200 years says that his business has been battered by heavy rains one year and scorching heat waves the next, slashing yields. "Events are getting more intense. The summers are getting hotter; the monsoons are getting wetter."

Why it matters:

Warming weather and climate change impact everything from home insurance to concerts to — perhaps most notably — the food we eat. 

As traditional growing regions become inhospitable, some producers seek new territories. Winemakers are venturing north to places like Sweden, Canada, and the UK. Olive growers are experimenting with orchards in Austria and other non-Mediterranean areas. Some startups are building technology to grow crops despite drastic weather conditions. 

• But transitioning to new regions takes a lot of time and money. Olive trees, like coffee and cocoa, take years to reach full production. Specialized infrastructure, like olive mills, also needs to be built.
  

• In the meantime, consumers will have to accept higher prices and potentially compromised quality and flavor from crops stressed by climate change's extreme conditions.
  

• "Droughts and heat leave their mark," warned a German consumer group after finding many olive oils tasted "rancid or pungent."

The warming world offers a bittersweet challenge: maintaining the flavors we've savored for centuries while adapting to an increasingly inhospitable climate. 

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Quick Poll

On Wednesday, we asked: Do you currently own shares in Apple directly? Why or why not?

— Results were split. One Apple shareholder said, “Lock in the ecosystem (high switching costs). Large, profitable, and high free cash flow. Large cash position that provides protection and flexibility.” Another simply said, “Great management.” Others said, “I reluctantly own shares. The followers and buyers of its products are steadfast and dogmatic. It has one of the strongest moats in the marketplace.”

— Someone who doesn’t directly own Apple said, “I own Berkshire Hathaway, so consider that to be my Apple exposure.” Another said, “Apple is not going away. It will probably continue to grow and be one of the biggest companies in the world. Not a bad stock to hold for another 5 or 10 years.”

— A respondent who isn’t bullish on the iPhone maker wrote, “iPhone already max plateau as innovation. Vision Pro is for the wealthy as a fun toy only; it is not scalable. Very late, and catchup in AI is needed. Tim Cook is retiring soon, and there is no innovative successor. Sundown coming before next sunrise...”

See you next time!

That's it for today on We Study Markets!

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