Lex Midweek Letter: Sweetgreen and the US tech stocks that aren’t

Dear readers,

Can salad be a tech stock? Luxury salad chain Sweetgreen’s $4bn valuation suggests the answer is yes. The company used the word “platform” eight times more than “salad” in its listing document. It claims to be one of the few US restaurants “designed with technology as the basis for all elements of our operations”. The reward is a high market worth for a company that has yet to turn a profit.

Created in 2007, the Los Angeles company is exceedingly popular with high-earning workers in US cities such as New York and San Francisco. They chew on its bowls of shredded kale and roasted almonds in their lunch breaks. There are more than 140 restaurants around the US, known for their high prices and fresh ingredients. In San Francisco, the midday queues stretch out into the road.

Sweetgreen is what is known as “tech adjacent” — one of many companies that claim tech-like qualities and the higher valuation that comes with them. Before listing, Sweetgreen’s private valuation of $1.78bn made it a unicorn. Shares listed at $28 in mid-November, above the expected range. Cue jokes about plenty of sweet “green” dollars. After almost doubling, the price has fallen back to about $41 a piece.

Beyond a high valuation, what makes this a tech stock? Sweetgreen would point to the fact that more than two-thirds of revenues come from digital orders. This year, it purchased Spyce, which uses robotic cooking methods.

Steep losses and tight control also look like leaves out of tech’s book. In spite of operating for more than a decade, Sweetgreen remains resolutely unprofitable. It reported a loss of $87m on revenue of $243 in the 39 weeks to September 26. Its three founders, Nathaniel Ru, Nicolas Jammet and Jonathan Neman, have retained control of the company by holding shares that confer 10 votes each. Public shares carry just one vote.

Revenue growth is unimpressive, with the proviso that the pandemic has held the company back. Sweetgreen insists it will double in size over the next three to five years. If office workers continue streaming back into city centres, sales should rise. But food costs are high and the tight labour market in the US could raise wages, holding future profits down.

Compare Sweetgreen with a large chain of restaurants such as Chipotle and its valuation is hard to defend. Chipotle sells tasty burritos at affordable prices. It is a $48bn company with sales of $7bn in the 12 months to September 30. That means it trades at close to seven times trailing sales. Sweetgreen trades at more than 16 times trailing sales.

But Sweetgreen — with its app sales and ambitions for robot salad mixing — is part of a group of hipster, tech-enabled companies into which Chipotle will never be welcomed. The group also includes direct-to-consumer brands such as eyewear group Warby Parker, San Francisco trainer company Allbirds and mattress brand Casper.

Market excitement is flagging. Casper’s initial public offering in early 2020 was a lacklustre affair. Net losses increased in the past year to $25m in the quarter that ended on September 30. It is being taken private by buyout firm Durational Capital Management at a fraction of its pre-IPO $1.1bn valuation.

Warby Parker, whose losses are also growing, trades at $53 per share, down from $54 at which the direct listing began trading in September. Allbirds’ stock rose 90 per cent on its first day of trading last month, but has since fallen back and now trades about 32 per cent above its IPO price.

What they have in common are strong brands, losses, high valuations and not particularly high growth. It takes more than online sales to be a tech stock.

Enjoy your week,

Elaine Moore
Deputy head of Lex