Chipotle Mexican Grill (CMG 0.17%) has had a terrific year so far in 2023, riding the tailwinds of the broader market recovery. Shares of the burrito purveyor are up 49% so far this year, more than quadruple the gains of the S&P 500. That performance is in stark contrast to its results last year, when the stock slumped nearly 21%.
The rally so far this year came on the heels of the company's stronger-than-expected financial results released on April 25. Demand for Chipotle's "food with integrity" remains strong, even in the face of macroeconomic headwinds. This performance has boosted investor confidence that the company could rise even further, fueled by a rebound in consumer spending.
What does this news mean for investors who sat out Chipotle's current run-up? Should they buy now expecting the rally to continue or avoid the stock because of its frothy valuation and continuing uncertainty facing the broader economy? Let's take a look.
Image source: Chipotle.
What's been weighing on Chipotle stock?
Last year wasn't without its challenges, but Chipotle's results were remarkably resilient. Revenue of $8.6 billion climbed 14%, while adjusted earnings per share (EPS) of $32.78 jumped 29%. This hardly seems like a company in trouble, but Chipotle's growth was far more impressive in 2021, when revenue grew 26% and adjusted EPS soared 60%. Weighing on its growth last year were fears of a potential recession, which hung over the stock like a dark cloud since the majority of economic activity hinges on consumer spending.
Those dark clouds may be lifting. Even if there is a recession in 2023, it will probably be much milder than originally anticipated, with most economists predicting a "short and shallow" downturn. Furthermore, once inflation abates, consumers will have greater disposable income -- which might increase their appetite for fast-casual offerings including Chipotle.
What could drive Chipotle stock higher?
In addition to a rebound in consumer spending, Chipotle has other drivers that could push its stock higher.
Chipotle has shown improvement in a number of its financial metrics over the course of the past year. In the first quarter, revenue growth accelerated to 17.2%, up from 16% in the prior-year quarter, driven by comparable-store sales that increased 10.9%. More impressive, however, was the company's ability to wring more profits from each sales dollar, as operating margins jumped to 15.5%, up from 9.4%.
Another potential driver is Chipotle's continuing expansion, adding 41 new restaurants in the first quarter, with 34 of those locations including a margin-boosting Chipotlane -- a dedicated lane to pick up digital orders. The company plans to accelerate its ongoing expansion, with plans to open between 255 and 285 new locations this year.
There's more. Earlier this year, Chipotle announced plans to introduce a new concept restaurant called Farmesa. The new restaurant "is a fresh, bold concept featuring delicious proteins, greens, grains, and vegetables that are inspired by Chipotle's Food with Integrity standards," the company wrote in a press release. Farmesa will offer a variety of bowls, which will include a protein, greens or grains, two sides, and a choice of five sauces. The restaurant soft-launched with a limited menu earlier this year, before ultimately expanding in March.
It's important to note that this isn't the first time Chipotle has dabbled in a new restaurant concept. In September 2011, the company rolled out the first ShopHouse Southeast Asian Kitchen, followed by Pizzeria Locale and Tasty Made burgers in 2016. Each of those concepts eventually fizzled, but that hasn't stopped Chipotle from searching for another winning formula. If management can strike the right balance, it's easy to imagine that Chipotle's empire could double in size from here.
How to approach Chipotle stock now
Given that Chipotle is currently selling at 56 times trailing-12-month earnings and 6 times trailing sales, the stock isn't exactly cheap. Yet investors remain remarkably bullish on the stock, with analysts' consensus estimates calling for revenue growth of 15% this year and 12% in 2024. Furthermore, Wall Street has consistently underestimated Chipotle's performance, so its actual results could be higher. With that as a backdrop, its valuation may not be as lofty as it appears at first glance.
That said, and as I've illustrated, Chipotle has several catalysts that could drive its stock significantly higher in the months and years to come. Smart investors who can handle a little short-term volatility should consider establishing a position now and holding for the long term, particularly given Chipotle's history of strong results and the long runway ahead.
