If there's any important takeaway investors should have gotten from the past few years, it's just how resilient Chipotle Mexican Grill's (CMG 1.40%) business really is. The company's competitive position was strengthened because of the pandemic, and as inflation remains elevated, the fast-casual restaurant chain is proving that it has pricing power.  

After falling 21% in 2022, the stock is up 16% so far this year. So, are Chipotle shares overvalued as we look ahead in 2023?  

A side of guac and optimism 

As of this writing, Chipotle stock currently trades at a price-to-earnings (P/E) ratio of 56, which is more expensive than restaurant peers like Starbucks and Domino's Pizza. That valuation comes as Chipotle has crushed the market historically, rising almost fivefold over the past five years. 

Chipotle counts 3,090 stores in its total footprint today. But the management team, led by CEO Brian Niccol, firmly believes that the business can have 7,000 locations in North America at some point. This is up from a prior target of 6,000.

What's more, the company thinks that the annual sales per store can eventually go "well beyond" $3 million, up from $2.8 million in the third quarter of 2022. At this level of scale, Chipotle's annual revenue would be $21 billion. 

Let's assume that Chipotle hits this goal by 2030. With a projected profit margin of 15% by then (it's never even hit 11% in the past), the current market cap of $45 billion compared to the estimated net income of $3.2 billion is still over 14.

In 2030, a mature Chipotle that has maxed out its expansion plans might carry a P/E of 20, translating to a 43% return over the next seven years or so -- not very exciting. And this is in the most aggressive scenario, one where the company adds more stores per year than it has in the past. 

To be fair, there is the possibility that its leadership upgrades its growth assumptions, but this isn't something investors should factor into their buying decisions since it's inherently unknowable. As a result, it's obvious that Chipotle shares are overvalued today. 

Where's the margin of safety? 

Ben Graham, considered the father of value investing, who was an early mentor to Warren Buffett, always hammered home the point that before buying any stock, investors should demand a margin of safety.

This means that no matter what valuation method you use, the purchase price should be attractive enough that even if a company underdelivers on its outlook, you can still make money on the investment. In other words, you buy a stock for less than what you think its value truly is. 

There's no doubt that by making an investment in Chipotle right now, you are banking on better-than-perfect execution in the future. Betting on a business to achieve lofty growth targets can be a lucrative strategy that produces stellar returns, but not at the wrong price.

In fact, as a company starts fulfilling its market opportunity -- and as a result, its prospects start to deteriorate -- then a lower future valuation is warranted. 

Now, if Chipotle can exceed revenue and earnings expectations throughout 2023, starting with its 2022 fourth-quarter financial release (scheduled for Feb. 7), then bulls can make the case that the stock could continue marching higher in the near term.

That's especially true in this type of economic environment, where many analysts are predicting bottom-line figures to be under pressure. The shares are already up more than 16% to start the year, so if you want to try to ride that continued momentum to an ever-increasing valuation multiple, that's up to you to decide. 

The way I see the situation, I can't justify paying a P/E of 56 for Chipotle right now. If that ratio somehow got below 30, then I'd likely load up on the stock. This is certainly a fantastic business with competitive advantages, stellar growth and profitability, proven resilience during the pandemic and in an inflationary environment, and a still-sizable expansionary runway in the decade ahead.

But that reality is well-known and fully priced into the stock today, and then some. In my opinion, the best course of action for investors is to wait patiently for a better entry price.