Is it too late to buy Chipotle stock?

Chipotle Mexican Grill (CMG 2.92%) has long been a winning stock for investors, but especially so since Brian Niccol took over as CEO in 2018. Over the past six years, Chipotle shares have risen more than 450%, handily outperforming the broadest. S&P 500. But now, Niccol has moved on, and investors in the fast-casual restaurant chain may wonder if the stock’s stellar performance is coming to an end. Is it too late to buy Chipotle stock?

Chipotle’s growth trajectory

Since Niccol took the top job at Chipotle in 2018, he has positioned the company for the digital age, building drive-through locations and speeding up order fulfillment to add convenience for customers. He prioritized getting customers excited about the brand again, whether through a revamped loyalty program, new menu items or effective marketing campaigns. It’s easy to see why Starbucks wanted to hire Niccol as its new chief executive.

This has led to strong top-line performance throughout Niccol’s tenure, which is one of the main reasons to value this business. Between 2018 and 2023, Chipotle reported annual sales growth of 15%. In fact, there wasn’t a single year where the annual gain was less than 7% — and that was 2020, the first year of the COVID-19 pandemic and the strictest restrictions on in-person gatherings.

Chipotle’s revenue growth was driven by rapid growth in the number of stores. After opening 271 new locations in 2023 and 93 in the first six months of this year, the business operates 3,530 restaurants (as of June 30). Robust same-store sales gains, supported by higher traffic and spending trends, also deserve credit.

In April, Chipotle opened its first location in Kuwait in partnership with a local franchise group. The plan is to open three more stores in the Middle East. If the business learns that Tex-Mex food is popular there, it’s anyone’s guess how big the growth opportunity is.

But the US remains Chipotle’s most important market. Management has explicitly stated that the ultimate goal is to have 7,000 locations in North America in the long term, which would roughly double the current physical footprint. With each restaurant doing more than $3.1 million in annual sales volume with a superb operating margin of 28.9%, it makes sense why the executive team is hitting the gas pedal.

Even though Niccol has resigned, I don’t think shareholders have anything to worry about. His operational improvements have left the business in strong shape for his successor, who will not have to orchestrate a turnaround like Niccol did.

The price is not right

Most investors would agree that in terms of quality, Chipotle is hard to beat. However, that doesn’t mean the stock is an automatic candidate to add to your portfolio.

Rating is a critical factor that simply cannot be ignored. Thanks to its strong performance over the years, Chipotle’s stock is trading at a price-earnings ratio Ratio (P/E) over 53 at recent prices. That’s a massive 120% premium to the entire S&P 500. In my opinion, that’s way too much of a valuation to pay, even for a business whose growth has been as strong as Chipotle’s. I think a P/E multiple in the mid-30s makes more sense.

According to Wall Street consensus analyst estimates, Chipotle is expected to grow its earnings per share at a compound annual rate of 19.6% between 2023 and 2026. Of course, it’s usually a good idea to take these forecasts with a grain of salt of salt. But that outlook, while certainly impressive, doesn’t justify paying a P/E multiple as high as Chipotle’s currently, especially if you believe, as I do, that the valuation will decline significantly in the coming years.

The current setup for potential investors is not favorable as they are pricing in a ton of optimism about the future of the company. If Chipotle were to report same-store sales or margin data that missed analyst estimates, for example, I can easily see the stock.

I don’t necessarily think it’s too late to buy the stock. If the valuation were to drop substantially, then that’s a different story. So the best thing to do now is to wait and practice patience.