Popular Tex-Mex chain Chipotle Mexican Grill (CMG 1.30%) just reported a strong quarter, with revenue and diluted earnings per share up 13.7% and 28.1%, respectively, compared to the prior-year period. Sales slightly missed Wall Street consensus estimates, while the bottom line easily beat analyst projections. Nonetheless, investors haven't shown enthusiasm about the results.

The stock is down more than 10% since the announcement -- and 21% since the start of 2022. Does this mean that investors should take a bite out of this top restaurant stock? Let's take a closer look to find the answer. 

Continued momentum 

In the third quarter (ended Sept. 30), Chipotle was able to boost same-store sales 7.6% on a year-over-year basis, a clear indicator that the company's restaurants keep boosting their productivity. Transactions were down 1%, but management has been able to successfully implement menu price increases with "minimal resistance" from customers, according to CEO Brian Niccol. 

Chipotle's profitability expanded in the quarter as the enterprise's operating margin went from 12.3% in Q3 2021 to 15.1% in the latest quarter. Inflationary pressures for key ingredients like tortillas and avocados have been offset by rising menu prices -- an accomplishment that should impress investors.

While the company's digital presence played an important role during the depths of the pandemic -- increasing accessibility and convenience for customers -- eating at restaurants is making a comeback. In-store sales were up 22.1%, faster than Chipotle's overall revenue growth. But digital is still a focus, accounting for 37.2% of food and beverage revenue in the latest quarter. And Chipotle now has 30 million rewards members, which is remarkable given that the loyalty program launched in March 2019. 

With the Federal Reserve continuing to aggressively hike interest rates in order to curb surging inflation, many experts predict that the U.S. will enter a recession soon. In this scenario, people are sure to watch their spending and stretch their budgets. While customers might increasingly choose to buy groceries and eat at home, I still believe that Chipotle will remain a compelling value proposition in an economic downturn.

According to Niccol, the average price of a chicken burrito or bowl, the company's most popular item, remains below $9, which is tremendous value for the quality and amount of food customers receive. Additionally, Chipotle's customer base tends to come from higher-income households, above $75,000 annually, which supports demand in uncertain times. 

What's more, the management team sees a massive opportunity ahead. They believe that Chipotle can have 7,000 locations open in North America one day, which would be more than double the current footprint of 3,090 stores.

While the average store brings in $2.8 million in annual revenue right now, the hope is that this can eclipse the $3 million mark in the future. Altogether, this paints an incredibly bright future for Chipotle, with higher sales and profits in the decade ahead. 

Consider the valuation 

But no investment analysis is complete without considering a company's valuation as part of the overall thesis. Even the best businesses in the world can be poor investments if their stock prices are too expensive. I think this is the case right now with Chipotle. 

Over the past five years, the burrito leader's shares have soared 410%, despite falling 21% in 2022. The company is no doubt a high-quality name, and the market knows it. That's why the stock currently trades at a steep price-to-earnings ratio of 49. Investors are aware of Chipotle's success and positive outlook, and the shares reflect this optimism. 

Even if leadership's bullish target of having 7,000 stores is met within the next 10 years, the stock still looks very expensive and provides no margin of safety for investors. As a result, Chipotle is a great business that should remain on the watch list for now until a substantial pullback happens.