CMG

Is It Too Late to Buy Chipotle Stock?

In the past five years, the S&P 500 has produced a total return of 96%. That translates to an annualized gain of 14.4%. But there were individual stocks that crushed this gain.

You don't need to look at the tech sector to find huge winners. In fact, popular Tex-Mex chain Chipotle Mexican Grill (NYSE: CMG) has rewarded investors in remarkable fashion. Its shares have skyrocketed 314% since April 2019, which would have turned $1,000 into more than $4,100 today.

Is it too late to buy this booming restaurant stock for your portfolio?

Chipotle continues posting strong financial results

For shares to perform so well over an extended period of time like Chipotle's have, there's no doubt that the business in question has to have put up strong fundamental results. This has certainly been the case here.

In the past five years, Chipotle has been able to increase its sales base over 100% to $9.9 billion in 2023. This growth was driven by a rapidly expanding store footprint that now sits just above 3,400 locations. Chipotle has also been able to lean on its successful digital foundation, with its popular mobile app and rewards program, as well as its Chipotlane drive-through locations, to increase accessibility and convenience for its customers.

What's particularly astonishing is the company's performance during the past four years, when there was a pandemic, supply chain bottlenecks, inflationary pressures, and rising interest rates. Since posting a 5% revenue drop in the second quarter of 2020, Chipotle has reported double-digit sales growth in the past 14 straight three-month periods, a streak that hasn't ended.

Chipotle's profitability is also impressive. Margins have trended higher in the past several years. And in 2023, net income surged at a much faster pace than the top line did, demonstrating ongoing operating leverage.

This type of remarkable financial performance, despite macro conditions, has made Chipotle an investor favorite. That's why the stock has done so well.

Looking at growth prospects relative to valuation

Sometimes, it's a smart idea to assume that past winners will continue their positive streak going forward. Great businesses are likely to remain that way. However, there's another critical factor that can't be ignored.

I'm talking about valuation. As a result of Chipotle's monumental stock gain, it's not cheap. Investors who missed the rally in recent years can buy shares today at a nosebleed price-to-earnings (P/E) ratio of 66.2. That valuation is significantly higher than the S&P 500, and it represents a massive premium to other dominant restaurant stocks, such as Starbucks, McDonald's, and Domino's Pizza.

But astute readers will quickly point to Chipotle's growth prospects. The executive team has explicitly said that reaching 7,000 stores in North America over the long term is a realistic goal. That would result in a restaurant base that is double the current size -- and that doesn't even include Chipotle's potential in overseas markets, particularly in Europe and Asia.

No one knows when or if this target will be reached. However, based on the company's impressive track record and momentum, it looks like the market is extremely optimistic about this outcome becoming a reality. Chipotle will surely be able to produce greater revenue and profits at that type of scale.

Don't rush to scoop up shares just yet. Even with such lofty objectives, which I believe this business could actually achieve well into the future, I still view the stock as expensive. Expectations have outpaced Chipotle's underlying fundamentals. The market is fully aware of how high-quality a company this is, leaving no margin of safety at today's price.

In other words, investors who buy the stock today have substantial downside risk should any negative developments present themselves. That creates an unfavorable risk/reward setup.

Should you invest $1,000 in Chipotle Mexican Grill right now?

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Domino's Pizza, and Starbucks. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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