Chipotle Mexican Grill (CMG) stock consistently attracts bullish investors, and recent events like the 50-for-1 stock split have amplified its popularity. While the initial hype around the stock split has subsided and shares have retreated from year-to-date peaks, Chipotle stock remains a market outperformer, boasting a 26% gain so far this year. This begs the question: Why Is Chipotle Stock So High, and can this upward trend persist through the remainder of 2024?
Drivers Behind Chipotle’s Stock Surge
The anticipation and execution of the stock split undeniably contributed to the increased interest in Chipotle stock in 2024. Announced in mid-March, the split announcement itself triggered a 17% rise in share value leading up to the June 26th event. Stock splits are often a consequence of sustained share price appreciation and positive market sentiment, both of which are strongly present for Chipotle.
Chipotle’s leadership in the fast-casual dining sector is a fundamental reason for its high stock valuation. The company’s commitment to fresh, healthy food at accessible prices cultivates a loyal customer base. In a competitive restaurant landscape where many chains are struggling, Chipotle demonstrates robust and consistent comparable-sales growth. Furthermore, Chipotle exhibits impressive profitability with expanding margins, even when facing rising costs for food and labor.
Chipotle’s aggressive expansion strategy also fuels investor optimism. The company opened 47 new locations in the first quarter alone and aims to launch approximately 300 new restaurants in 2024, an increase from 271 in the previous year. Looking ahead, management has articulated a long-term objective to more than double its store count from around 3,500 to over 7,000 locations.
Is Chipotle’s Valuation Justified?
Despite the compelling growth narrative, a recurring concern among investors centers on Chipotle’s valuation. Currently, the stock trades at a price-to-earnings (P/E) ratio of 62. While this represents a premium valuation, it is noteworthy that it is actually below its five-year average P/E multiple of 76.
This premium valuation is underpinned by Chipotle’s proven track record of performance. However, a P/E ratio of 62 is still considered high for a company reporting revenue growth in the low double digits. For context, a high-growth technology company like Nvidia, with triple-digit growth rates, trades at a P/E ratio of around 75.
Chipotle stock has experienced a 12% decline since its stock split, mirroring a broader pullback in the restaurant sector amid analyst forecasts of a slower summer season. However, investors should prioritize long-term trends over short-term market fluctuations. A fundamentally strong business like Chipotle is well-positioned to recover from temporary setbacks.
While not currently undervalued, Chipotle’s stock price reflects its strong market position and future growth potential. For investors with a long-term horizon, the question isn’t necessarily whether Chipotle stock is cheap today, but whether the company’s ambitious expansion plans and consistent performance justify its current valuation and continued investment. Current market dynamics suggest Chipotle has the momentum to maintain market-beating gains, but the long-term outlook, driven by its expansion strategy, is what truly validates its high stock price.
