Wingstop's 2025 Outlook: Is the Post-Drop Valuation a Buying Opportunity?

Wingstop's (NASDAQ: WING) name is absolutely accurate. It's a place where you can stop to buy chicken wings. However, this fast-growing restaurant chain has seen its shares go from loved to seemingly unloved in a very short period of time. Wingstop's shares have declined nearly 50% from their 52-week highs.

And yet the business is still executing quite well. Is the stock drop here an opportunity to buy Wingstop?

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What does Wingstop do?

Wings are very popular, and that's been good for the company's business. Which brings up the second-level view of the company's business. Yes, it is a chicken wing restaurant, but it is also a restaurant developer. To be more precise, it's building new restaurants to expand its business. Running a restaurant and building a restaurant are two different skills.

Image source: Getty Images.

This is why the restaurant industry looks at sales, which is just the top line of the income statement, as well as comparable-store sales -- revenue from stores that have been open for more than a year. The latter metric, also called comps, is important because it provides investors with a view into how well a restaurant company is managing its existing store base. That information can easily get obscured on the top line if a restaurant is rapidly opening new locations, since each new location adds materially to the top line.

Luckily for Wingstop, it is doing well on both metrics. In 2024, sales rose a huge 36.8% driven by the opening of 349 new locations. That's almost one new store opening per day!

That kind of pace requires a lot of management attention and increases the importance of comps. And Wingstop is nailing that figure, too, with comps up a lofty 19.9% domestically in 2024. That's a huge number for a restaurant, where growth in the low single digits for existing locations is considered a pretty good outcome.

Wingstop's shares have fallen from the sky

Given that constructive backdrop, it might seem odd that Wingstop's shares have declined so sharply. It seems reasonable to ask how much more Wall Street could want from the company.

Except that might be looking at the issue from the wrong direction. It might be more prudent to ask: Could any company live up to the expectations Wall Street had priced into the stock? Over the past year, the peak price-to-sales (P/S0 ratio was over 25. Its peak price-to-earnings (P/E) ratio was over 157. Those are very large numbers for these valuation metrics.

To give you an idea of just how high the restaurant's valuation got, the S&P 500 index's average P/E is about 27. To say that Wall Street was enthusiastic in its assessment of Wingstop would be an understatement. It was likely just a matter of time before investors questioned the valuation this company was being afforded.

WING data by YCharts.

Today, after the huge drawdown, Wingstop's shares are trading with a P/S multiple of about 10 and a P/E multiple of around 61. Those are much lower valuations, but still not low by any stretch of the imagination.

However, big price swings for this stock aren't uncommon, and the current drawdown has brought both ratios back down to ranges that appear reasonable for Wingstop, historically speaking.

Wingstop is not for the faint of heart

From a business perspective, the chain's aggressive expansion efforts are a risk that investors need to monitor closely. And it is one that shouldn't be understated, since running the base of existing stores well and opening lots of new stores is hard to do on a consistent basis.

That said, the game plan for 2025 is to increase the store count by as much as 15%, so it looks like there's plenty more growth opportunities ahead if management can get the balancing act right. The stock price decline, however, requires a more nuanced take.

The risk was obviously elevated when the stock's valuations were at their peak levels not too long ago. So, in a sense, Wingstop's valuation is much more appealing today relative to its history. But at the same time, its valuation remains very high on an absolute basis.

If you are a growth investor, it might make sense to look at the restaurant chain following its big drop, but if you care at all about valuation, you'll probably want to look elsewhere. If you do end up buying Wingstop, be prepared for volatility, which appears to be quite normal for the stock.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Wingstop. The Motley Fool has a disclosure policy.