Chipotle Just Did a Stock Split. History Says This Is What Might Happen Next.

A stock split doesn't fundamentally change anything about a business. Its financials remain the same, the stock's earnings multiples are the same, and it's just as good a buy as it was before the split. But that doesn't mean stock splits don't have an effect on a stock's performance. They are, after all, a positive sign that a business is doing well and that the share price is high enough that deploying a split is a justifiable move for management.

Chipotle Mexican Grill (CMG -1.21%) has been a phenomenal growth stock over the years. With many stocks splitting their shares in recent years, questions were arising about when Chipotle might finally follow suit. Now that it has, the stock is trading at a much more modest share price of around $60. But with stock splits attracting a lot of attention, could Chipotle's stock be due to rise a whole lot higher?

How other stock split stocks have done

Many growth stocks have been doing well in recent years, and that has led to companies enacting stock splits. Lowering the share price makes a stock more accessible to a wider pool of investors, which can trigger more buying. Even if someone can own fractional shares, there can still be the connotation that because a stock's price is high, it's expensive. Although that's a flawed way of looking at a stock (investors should focus on multiples rather than just the raw stock price), the gains that some stocks have accumulated after deploying splits do appear to corroborate the notion that stock splits can have a positive effect on price.

Here's a list of some of the more notable stock splits in recent years, and how the stocks have performed since then.

Data source: Google Finance. Calculations by author. Estimated returns as of July 8, 2024.

The only stock that didn't produce a positive gain since its recent stock split was Tesla. However, if you go back to its 2020 stock split, it's technically gone up significantly since then. But by and large, buying a stock after a split has led to some great returns for investors.

How high could Chipotle's stock go?

Chipotle's stock is down 6% in the past month, and it hasn't been taking off since its shares split on a 50-for-1 basis on June 26. But it's still early on, as most of those returns noted above are for periods of around two years or longer. And aside from Walmart, which only did a split earlier this year, and Tesla's first split, each one of the stocks noted earlier has generated gains of at least 50%.

Assuming Chipotle's stock follows suit, the stock could climb to around $90 within the next year or two. The one problem, however, is that the stock isn't cheap. It's trading at nearly 70 times its trailing earnings. And Wall Street analysts project just 8% upside in the near term; their price targets typically project over the next 12 months.

But with Chipotle being a growth beast and management expecting to double its restaurant count to at least 7,000 locations, the stock could very well continue to rise despite its seemingly high valuation. As profits grow, the stock's earnings multiple comes down, which would make its valuation a lot more attractive for growth-oriented investors.

Should you buy Chipotle stock?

Chipotle can be a good long-term investment given its plans for more restaurant openings and its proven ability to scale effectively. As long as you're planning to buy and hold the food stock, Chipotle can make for a good buy.

While a stock split can give it some momentum, that's not something investors should rely on for strong returns. Ultimately, that'll come down to its financial performance, and that's why many of those stocks listed earlier are continuing to do well -- because their financial numbers are strong, not because they split their shares.

It's tempting to look at trends and assume that a stock split will have a similarly positive effect on Chipotle, but that can be a dangerous assumption to make. However, as long as Chipotle continues to deliver strong results, it's probable that the stock will generate good returns for investors.