I recently argued that it may make sense to take some chips off the table with Chipotle Mexican Grill (CMG 0.53%) stock. But a number of analysts have since argued the opposite. Indeed, four analysts have raised their 12-month price targets for the stock to prices over $2,000.
Their price targets, when averaged together, translate to 32% upside from here. Adding to the excitement, Chipotle announced an entirely new restaurant on Wednesday, giving the company another potential revenue stream. Are shares more attractive than I thought?
Let's take a look at Chipotle's new restaurant, as well as explore why some analysts are so bullish.
Don't count on Chipotle's new restaurant yet
Meet Farmesa. The restaurant, which features dishes like grilled tri-tip steak, salmon, and sweet potato chips, is part of an effort by the company to test and learn from new restaurant concepts. Kicking off with a soft opening this month in Santa Monica, California, the restaurant concept will officially open next month.
While a new restaurant brand could help diversify Chipotle's business, investors should refrain from assigning potential new restaurants any value in their analysis of Chipotle stock until a new chain has proven itself to be a meaningful contributor to the company's financials. Until new chains can contribute profits to the parent company, they're just an incremental expense.
This announcement doesn't make the stock any more attractive -- at least not yet.
Why these analysts are bullish on Chipotle stock
Some of the analysts with the highest 12-month price targets for Chipotle stock include Credit Suisse's Lauren Silberman ($2,050 target), Wedbush analyst Nick Setyan ($2,080), Cowen analyst Andrew Charles ($2,050), and Citi analyst Jon Tower ($2,084). While each analyst brings unique insight to the table, some of the more frequently cited catalysts for Chipotle include positive year-to-date foot traffic at its stores despite recent price increases, a robust outlook for first-quarter same-store sales growth, and the company's progress in improving restaurant-level operating margins.
These are fair points. The company's restaurant-level operating margin rose by 380 basis points to 24% in Q4. Further, Chipotle provided surprisingly robust guidance for its first-quarter comparable-restaurant sales, forecasting a growth rate in the high single digits (though Chipotle did say its same-store sales growth could decelerate in Q2 and Q3). Finally, the company encouraged investors by saying that its restaurant foot-traffic trends turned positive in the first month of 2023.
But the issue of valuation remains. With shares trading at about 50 times earnings at the time of this writing, continued positive trends at the company's restaurants, planned new Chipotle locations, further optimization across its existing restaurants, and expanding profit margins may be largely priced into the current stock price.
For this reason, I continue to believe it might make sense for investors to consider trimming some of their stake in the company. The stock's 465% gain over the last five years may have made the fast-casual burrito chain's stock price too expensive to justify continuing to hold a full position in the stock.
So is Chipotle stock headed to $2,000 and beyond? It certainly seems like it's an achievable target at some point in the future. But a level above $2,000 within 12 months seems unrealistic, given how pricey the stock already appears and considering the uncertain and unpredictable macroeconomic environment in which the restaurant is operating.
