Chipotle Mexican Grill (NYSE: CMG) is a market-beating stock. Shares have soared 248% in the past five years, a gain that crushes the return of the S&P 500 index. And since the initial public offering (IPO) in 2006, shares are up an astonishing 6,450% and are certainly making early investors rich.
Can this top-notch restaurant stock, which currently trades 16% below its peak price, help you become a millionaire in the future? Here's what investors need to know.
In the hypercompetitive restaurant sector, Chipotle has carved out a successful niche in the fast-casual corner of the market. It has been thriving in recent years, and there is no reason to believe that success is going to end anytime soon. Yes, former star CEO Brian Niccol is gone, but this business still has key members of the leadership team, like interim CEO Scott Boatwright and Chief Strategy Officer and former CFO Jack Hartung, which can keep operations running smoothly looking ahead.
Growth has been fantastic in the past. Revenue in the second quarter of 2024 (ended June 30) totaled $3 billion, which was 114% higher than in the same period five years earlier. The business is expanding due to a combination of impressive same-store sales growth from more transactions and higher-average tickets, as well as new-store openings. Chipotle plans to open 300 net-new locations this year. And it just opened its first restaurant in Dubai, indicating management's attention to penetrate new markets.
But there is still huge potential here at home. The leadership team believes that Chipotle can one day operate 7,000 restaurants in North America. That's double the current footprint. It makes sense to rapidly open new stores, given the average location generates more than $3.1 million in annual sales, a figure that continues to steadily rise, and boasts a restaurant-level operating margin of 28.9%.
One can easily argue that Chipotle has built an economic moat with its brand presence. I have already discussed the company's strong same-store sales gains, as well as its restaurant-level sales and profit metrics. One clear indicator of the brand's power comes from Chipotle's ability to successfully raise its menu prices over the past couple of years to offset inflationary pressures. Consumers have still flocked to the restaurant's locations to buy burritos, bowls, and tacos.
The company's successful digital platform and loyalty program also help raise the brand's visibility. Plus, it gives executives a valuable channel to amass data that can inform menu innovations and marketing strategies.
Chipotle is a high-quality enterprise, so there's no doubt that it should at least be on investors' watch lists, especially those who care about owning businesses with economic moats. However, valuation is a critical variable that can have a big impact on a stock's return potential.
Chipotle isn't cheap, even on the current dip. The shares trade at a price-to-earnings (P/E) ratio of 56.5. This is 134% more expensive than the S&P 500. At this exact moment, the Tex-Mex chain's valuation is even higher than the booming artificial intelligence (AI) stock Nvidia, which sells for a P/E multiple of 55.8. I'm not sure that this is justified even when keeping in mind the favorable traits mentioned above.
Chipotle has been a wonderful stock to have owned in the past. But I'm not so sure that it can be a millionaire maker looking toward the next decade and beyond. The market's expectations remain sky-high, and this introduces a potential headwind to achieving outsized returns for your portfolio. Unless the valuation comes down considerably, I think the stock should remain on the watch list for now.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.