Over the past five years, shares of Chipotle Mexican Grill (CMG 2.41%) have rewarded investors in a wonderful way, skyrocketing 343%. This gain crushes what you would've earned in a fund that tracked the S&P 500 or the Nasdaq Composite.
And continued business momentum is driving shares even higher, which should put Chipotle on the map as a potential investment opportunity for those who might have missed the boat up until now. This magnificent restaurant stock could be a no-brainer buy -- but only if shares take a serious dip.
Extreme optimism
Thanks to Chipotle's monster performance over the past several years, the stock is ridiculously expensive right now. It trades at a price-to-earnings (P/E) ratio of about 62. That's a premium price tag that makes Chipotle's current valuation more expensive than both the S&P 500 and the Nasdaq-100 Index.
To provide more context, compared to the so-called "Magnificent Seven" stocks, Chipotle trades at a steeper valuation than every single business except for Nvidia and Amazon. Mind you, this is a restaurant operator, not an enterprise at the cutting edge of artificial intelligence.
Consequently, it's all about practicing patience. Investors need to wait for a sizable pullback. Optimism looks to be fully priced in, reducing the chances of strong returns going forward.
Wonderful business
Some of Chipotle's most bullish supporters would argue that the valuation is justified given that this is an extremely high-quality business. The company is absolutely thriving right now.
Chipotle reported 2023 revenue of $9.9 billion. That represented a 14.3% year-over-year gain. And this figure was up more than 100% compared to five years ago, demonstrating remarkable growth.
What's really encouraging is that Chipotle is posting solid gains in an uncertain macroeconomic environment. Transaction counts were up 7.4% in the fourth quarter of last year despite menu price hikes. Consumers still clearly find tremendous value in the food Chipotle offers, which might mean there's even more potential pricing power for management to tap.
A key part of Chipotle's strategy is to open new restaurants at a rapid clip. The store count expanded by 271 last year, with the total footprint now at 3,437 locations. Executives see there being 7,000 restaurants open in North America one day, twice as many as the current scale.
Chipotle has shown an ability to expand profitability as sales have increased. As the store count rises, investors have every reason to believe that margins will keep on improving.
What price is right?
Even when you factor in all of these positive attributes, the stock is still expensive in my opinion. You should only buy the stock if you believe that Chipotle's long-term potential is even greater than what management has talked about. However, this would require truly lofty projections.
On the other hand, investors can practice patience and wait for a much better entry price. But at what valuation would the stock be an attractive buying opportunity?
At the current P/E multiple, investors are getting a business that is projected to increase revenue and earnings per share at compound annual rates of 13.8% and 20.4%, respectively, between 2023 and 2026. Should these forecasts become reality, it would mean that Chipotle currently trades at 35 times its estimated 2026 earnings. That's still not a compelling valuation.
There's no doubt that this is a fantastic company. But I wouldn't touch the stock with a 10-foot pole unless its P/E ratio got cut in half, dropping in the ballpark of 30. I think this level would make the shares a no-brainer buy.
Given the heightened levels of optimism and excitement surrounding Chipotle's prospects, I'm not sure if the market will ever present us with that kind of opportunity. If it does happen, though, investors should act quickly.
