Fast-casual restaurant chain Chipotle Mexican Grill (CMG -0.48%) is one of the great growth stocks of our generation. Since going public in 2006, the stock has gained over 3,000%, beating the market over nearly 17 years. It's outperformed recently as well, returning 90% over just the past three years, compared to the 24% return of the S&P 500.

Wall Street believes Chipotle has more market-beating upside ahead. According to TipRanks, 17 out of 19 analysts believe it's a stock worth buying today. And the average price target is $1,845 per share, which is about 34% higher than where the stock trades right now at $1,377 per share. 

Here's why Wall Street loves Chipotle stock, but why you should approach this investment opportunity with realistic expectations.

Chipotle's mouth-watering business

Chipotle has around 3,100 locations as of the end of the third quarter of 2022. They're mostly located in the U.S., and they're all owned by the company -- there aren't any franchises. Being a 100% company-owned chain is a rarity in the restaurant world.

Chipotle is willing to be different with its business structure because its restaurants offer something that few can: Chipotle's sales per location -- known as average unit volumes (AUV) -- are incredibly high. As of Q3, Chipotle's restaurants generate AUV of almost $2.8 million.

Restaurant chains are typically plagued by an unappetizing reality: Profit margins are razor-thin. That's why the majority choose to implement a predominantly franchised business model. Franchisees are left with the razor-thin margins, whereas the restaurant franchiser collects the higher-margin franchise fees.

However, Chipotle's abnormally high AUV allows it to enjoy efficiencies of scale that few of its peers can imagine. The company has a 25.3% operating margin at the restaurant level as of Q3 -- this excludes non-restaurant company expenses like corporate overhead. There might be other companies out there, but I'm unaware of better profits at the restaurant level. And it's largely the result of Chipotle's high AUV.

Long-term, Chipotle's management believes it can get its restaurants up to AUV of $3 million, which would theoretically push profit potential higher. Bernstein analyst Danilo Gargiulo is even more optimistic than management. According to The Fly, Gargiulo believes Chipotle can reach AUV of $3.4 million, which is partly why he gave the stock a price target of $2,000 per share -- one of the highest price targets for Chipotle that there is.

Some reasons to be cautious with Chipotle stock

Hopefully it's clear that Chipotle is a great business. That's why so many on Wall Street are bullish on its prospects. But is Chipotle stock really a good investment today? There are some important counter-points to consider.

First, Chipotle's restaurant-level operating margin has already achieved a very high level. On one hand, that's good. For the last five full years, the company's restaurant-level operating margin ranged from 16.9% in 2017 to 22.6% in 2021. It's recently raised menu prices to support its healthy Q3 margins. And food and labor expenses are surprisingly down as a percentage of revenue, despite a period of high inflation.

Given that its profit margins are already historically high, I believe it's fair to wonder how much more they can be improved. Moreover, food costs dropped below 30% of revenue in Q3 -- something analysts have pointed out is unusual. Given this dynamic, how much more can Chipotle raise prices before consumers push back? It seems more likely to me that restaurant-level operating margin might come back down a little over time.

If I'm right, then revenue growth could have a larger effect on Chipotle's stock. Revenue growth will mostly come from new restaurants. Management believes it can operate 7,000 locations in North America and plans to open 255 to 285 new restaurants in 2023 alone. However, considering the company's large size already, it appears it could be trending toward a single-digit annual growth rate.

Chart showing overall growth in Chipotle's quarterly YoY revenue since 2018.

CMG Revenue (Quarterly YoY Growth) data by YCharts

Finally, slowing growth could be problematic for Chipotle stock because of its valuation. The stock trades at a price-to-earnings (P/E) ratio of 48 and trades at 32 times forward earnings estimates, according to Yahoo Finance. That's a premium to the S&P 500's average P/E ratio of about 20.

A lofty P/E premium implies the possibility of above-average earnings growth. But with margins already very high and with revenue growth possibly slowing, it's hard for me to imagine Chipotle living up to this assumption.

For these reasons, I wouldn't buy Chipotle stock today. However, if I already owned it, I would be happy to keep holding it, allowing my long-term gains to continue compounding. As already outlined, this is a great business. Therefore, it's worth a hold, in my opinion. And I'd consider buying at a more attractive valuation.