Chipotle Mexican Grill (NYSE: CMG) shares have risen 343% in five years. This gain dwarfs an S&P 500 or Nasdaq Composite ETF. Shares are rising as business momentum continues, putting Chipotle on the radar for investors who missed out. This amazing restaurant stock could be a steal if shares drop sharply.
Chipotle's stock is excessively expensive due to its stellar performance in recent years. Its P/E is around 62. Chipotle's valuation is higher than the S&P 500 and Nasdaq-100 Index. To clarify, Chipotle is valued higher than all but Nvidia and Amazon among the "Magnificent Seven" stocks. This is a restaurant operator, not an AI-powered company.
Thus, patience is key. Wait for a big pullback, investors. The market seems to have priced in optimism, decreasing future returns.
Some of Chipotle's most optimistic fans say the valuation is justifiable since the company is so good. The company is booming. Chipotle earned $9.9 billion in 2023. The year-over-year increase was 14.3%. This value was up over 100% from five years ago, showing amazing growth.
The fact that Chipotle is growing in an uncertain macroeconomic environment is promising. Transactions rose 7.4% in the fourth quarter of last year despite menu price increases. Chipotle's food remains highly valued, which may provide management additional price flexibility.
Chipotle's aim is to open new restaurants quickly. Last year, the store count rose 271 to 3,437. One day, executives expect 7,000 North American restaurants, twice the current number. Sales growth has helped Chipotle enhance profitability. As store count rises, investors can expect margins to improve.
I think the stock is overvalued even with these benefits. You should only acquire Chipotle stock if you think its long-term potential is greater than management claims. This requires extremely optimistic estimates. Investors can be patient and wait for a better entry price. At what price would the stock be worth buying?
Investors are buying a company with 13.8% and 20.4% compound annual growth in revenue and earnings per share between 2023 and 2026 at the current P/E ratio. Chipotle trades at 35 times its expected 2026 earnings if these expectations come true. That valuation is still unattractive.
This is a great company. Without a P/E ratio shaved in half, at 30, I wouldn't touch the stock. I think this level makes the shares a no-brainer buy. I'm not sure if the market will ever give us that opportunity given Chipotle's high hopes. However, investors should act swiftly if it does.
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