Chipotle Mexican Grill (NYSE: CMG) has done a great job at satisfying the hunger of its investors. Since the company's initial public offering (IPO) in January 2006, shares have skyrocketed 6,470%. This means that a $10,000 investment made nearly 20 years ago would be worth a jaw-dropping $657,000 today.
Investors who bought shares early on and held them have probably amassed sizable wealth from the Tex-Mex fast casual chain. However, the market cares about what the future holds.
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Could buying this top restaurant stock today set you up for life?
Growth potential
This might seem obvious, but growth is one variable that can drive huge returns over the long term. Luckily, Chipotle does not disappoint in this department.
The business opened 304 new locations in 2024, bringing its total to 3,726 as of Dec. 31. That figure is up 42% from exactly five years ago.
Unsurprisingly, this has resulted in tremendous revenue gains, with the top line rising 14.6% in 2024. Consensus analyst estimates predict revenue to increase at a 13% annualized pace over the next three years. A combination of healthy transaction growth and higher average ticket sizes propels same-store sales (SSS) gains.
Management is pressing on the gas pedal. Opening 315 to 345 new stores in 2025 is the target. And over the long term, there is potential to have 7,000 locations in North America. Opening more drive-through setups, called Chipotlanes, has been a priority to better serve guests in more accessible and convenient ways.
This says nothing of the opportunity overseas. Chipotle has 29 stores in Europe. And it opened three licensed locations in the Middle East last year. If the company finds success in these underpenetrated markets, it's anyone's guess what the ultimate store count could be.
Pricing power
Legendary investor Warren Buffett previously talked about how pricing power is one of the top traits to identify a high-quality business. Investors might not think Chipotle falls in this category, but it has proven that it can consistently raise menu prices to offset inflationary pressures.
That has helped profitability. The average Chipotle location puts up a stellar operating margin of 24.8%. CFO Adam Rymer sees a 2% benefit from pricing in 2025.
Given that SSS growth has been robust in the past few years, there might be untapped pricing power that management can take advantage of in the future. Providing customers with what they believe is lots of perceived value puts Chipotle in a very favorable competitive position.
"We're still a 30% discount on average to our peer group and the consumer sees value at Chipotle has benefit over price," CEO Scott Boatwright said on the fourth-quarter 2024 earnings call.
Lofty expectations
Chipotle shares have soared 234% just in the past five years. The winning stock trades at what I think is an expensive valuation, though. The current price-to-earnings (P/E) ratio of 52.1 doesn't draw attention as a bargain.
To be fair, though, Chipotle has done nothing but execute flawlessly in the past. Earnings per share have increased at a compound annual rate of 35% between 2019 to 2024. I think the current valuation, showcasing the market's bullishness, reflects these impressive historical profit gains.
As we look out toward the next five years and beyond, investors have to question if Chipotle can continue growing its bottom line at that kind of monster pace. It might be possible, but the P/E ratio likely implies that huge earnings gains are a foregone conclusion. In other words, I see no margin of safety for someone who purchases shares today.
Chipotle is an outstanding company. However, buying the stock right now won't set you up for life. In fact, this investment could end up underperforming the broader S&P 500 throughout the rest of the decade.
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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. The Motley Fool recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
