Chipotle (NYSE:CMG) has delivered significant long-term growth for its investors since the company's IPO in 2006. Since that time, the restaurant chain has provided a return of almost 40-fold from the original $22 per share IPO price. This has helped to make it one of the more successful consumer discretionary stocks in recent years.

While the company remains solid, both the stock and the company face significant threats. These perils go beyond COVID-19 or even the health scandals of a few years ago. Though Chipotle will more than likely become a larger company five years from now, it remains uncertain whether that growth will accrue to Chipotle stock.

A Chipotle burrito bowl sits on a table with queso and chips sitting nearby

Image source: Chipotle.

Why Chipotle soared over the years

Founded in 1993 in Colorado, Chipotle attracted McDonald's as an early investor at a time when it consisted of only 14 restaurants. Today, the company operates more than 2,600 restaurants across the U.S., 23 in Canada, and 17 locations in Europe.

Chipotle pioneered the concept of healthy fast food, becoming an early leader in the so-called "fast-casual" dining segment. This creation and the company's growth helped to fuel the stock price over the 14 years of its existence. Today, Chipotle stock trades at about $875 per share, about 7% below its all-time high of $940.28 a share set earlier this year.

CMG Chart

CMG data by YCharts

The company also continues to show its resilience. The E. coli and norovirus scandals led to massive sell-offs in Chipotle stock beginning in 2015. It went on to lose nearly 60% of its value over the next two years.

However, the company stepped up its safety efforts. Now, since the stock hit all-time highs earlier this year, it appears that investors have put the health-related scandals behind them.

Valuation questioned

Still, its history may lead some to question the valuation. Chipotle stock trades at a forward P/E ratio of about 91.7. This comes in well above the company average of approximately 47.1 for the last five years.

It also leads to questions about whether the company can justify its multiple. Analysts forecast average annual earnings growth of almost 18.6% per year over the next five years. However, that also includes a profit decrease of 40.2% this year with a rebound of 119% growth in fiscal 2021.

Moreover, this comes after a period of negative profit growth. Over the previous five years, earnings fell on average by 3.4% per year.

This is not to say the company is in trouble. Chipotle saw a $19.79 million net change in cash in the previous quarter. Also, the company continues to open additional restaurants. Nonetheless, it may indicate that Chipotle's stock price has moved ahead of the growth rate.

Threats to the business

Another worry about the valuation comes from the fact that Chipotle is no longer the only choice for Mexican fast-casual dining. Seeing Chipotle's success with this concept, El Pollo Loco, Qdoba, Freebirds World Burrito, and others have emerged. This could give investors pause about paying a premium valuation.

Moreover, many might forget that COVID-19 negatively affected the business. In March, comparable restaurant sales fell by 16%. Fortunately, the company had built a substantial takeout business before the pandemic. Also, the stock recovered relatively quickly from the lows of March's market sell-off. However, investors should not discount the negative effects of coronavirus on the business.

Furthermore, investors cannot count out the possibility of another health scare. As mentioned before, the stock lost more than half of its value after the E. coli and norovirus outbreaks. Although I hope such issues are no longer a problem with Chipotle today, investors may suffer further if another scandal tarnishes the reputation of the company.

Chipotle five years from now

Chipotle will more than likely grow into a larger company five years from now. Some areas of the U.S. have not yet reached a restaurant location saturation point. Also, with the company now in Canada and Europe, the current pace of expansion could persist for years.

Whether the stock price will reflect this larger size remains uncertain. The forward P/E ratio puts Chipotle's stock price years ahead of itself. Moreover, with multiple players in Mexican fast-casual dining, the company may face significant multiple compression as it becomes another large food chain in this space.

Although I expect Chipotle to remain a long-term winner, Chipotle stock may not reflect this growth over the next five years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.