Have Investors Lost Their Appetite for Chipotle Stock?

Given Chipotle's (NYSE: CMG) recent stock performance, one has to wonder if it's still reeling from the sudden departure of former CEO Brian Niccol last summer. Eight months after Scott Boatwright became the company's new CEO, the stock is now down over 25% from its high.

Despite the uncertainty such a transition brings, it's not necessarily clear why the restaurant stock is suffering. Is it down because of temporary factors, or do investors need to start taking a more negative view of the company? Let's take a closer look.

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The current state of Chipotle

At first glance, the CEO change looked like something that might have minimal impact. Boatwright had been the chief operating officer since 2017. Since he presumably played a role in the changes made by Niccol, that fact alone makes any significant changes to the company's successful business strategy less likely.

However, the results from the earnings report for the first quarter of 2025 might leave investors concerned about the state of the business. Chipotle experienced an annual comparable-restaurant sales decrease of 0.4%. Boatwright blamed consumer uncertainty for the slowdown.

Indeed, it's a considerable pullback from the 7.4% comparable-sales increase in 2024 and even the 5.4% yearly rise in comparable sales in Q4.

Also, Chipotle increased its restaurant count to 3,781 in Q1, a 12-month increase of 302 locations, or around 8%. With that, it reported $2.9 billion in Q1 revenue, but that 6.4% increase indicates Chipotle has lost some traction on a per-restaurant basis.

When factoring in operating costs, its operating margin in Q1 rose to 16.7% versus 16.3% in the year-ago quarter. Hence, even though its income tax expense rose, the $387 million in net income was an 8% yearly gain.

Nonetheless, the company predicts comparable-restaurant sales growth will stay in the "low single digits" for the year. That leaves shareholders wondering whether they'll have to adjust to lower growth numbers in future quarters.

Assessing the Chipotle investment case

Unfortunately, shareholders seemed accustomed to the higher growth rates of past quarters. Over nearly every period of three years or more, Chipotle stock typically outperformed the S&P 500.

Still, that changed in July of last year, two months before Niccol stepped down as CEO. Although the stock rose following his departure, it has steadily pulled back since December, and is now down 15% over the last 12 months.

Furthermore, the company's valuation is a concern due to the slowdown. Its price-to-earnings (P/E) ratio is 45, which is at the lower end of its range over the last five years. Chipotle has consistently been a pricey stock, but investors typically dismissed the valuation thanks to double-digit revenue growth. However, you might now wonder whether the recent drop is due to a compressed valuation.

Remember that more mature restaurant stocks, such as McDonald's and Niccol's current company Starbucks, trade at 28 times and 27 times earnings, respectively.

Maintaining Chipotle's high P/E will likely be a challenge. If growth slows permanently, that increases the chance of its valuation matching those of its more mature peers, presumably meaning a pullback of approximately one-third from current levels. Even if the stock doesn't fall that far, that differential indicates the share-price decline may continue.

Nonetheless, its relatively smaller size may help Chipotle compared to its larger peers. The number of Chipotle locations is less than one-tenth of either of these companies. That makes it easier to grow its footprint at a higher percentage rate.

Also, it plans 315 to 345 new locations in 2025 and has announced plans to open restaurants in Mexico. That indicates it can maintain its rapid pace of expansion, and possibly continue to command a premium valuation.

Should investors buy Chipotle stock?

For now, you should probably regard Chipotle stock as a hold. Admittedly, it continues to offer a compelling value proposition, amid a rapid expansion that's on track to continue.

Still, the company faces considerable uncertainty amid its leadership change and a sluggish economy, and the subsequent slowdown in sales growth seems to have worried investors.

Furthermore, Chipotle's P/E ratio may seem more appropriate for its more rapid growth in past years. Until you can either buy the stock more cheaply or identify a path for more rapid growth, you might want to refrain from adding shares.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.