Chipotle Mexican Grill(NYSE: CMG) is in the Wall Street doghouse again, with its shares now roughly 20% below their 52-week high. But that also happens to be how much the stock price is down from its all-time high. What's going on here? If you think it's too late to buy this growing restaurant chain, history suggests you are likely wrong. But it's still good to ask questions.
As you search for the answers on Chipotle, here are three things to think about before you make any decision about buying the stock.
1. Chipotle has plenty of room for growth
Restaurant chains can grow their businesses in two basic ways. First, they can improve the sales that are generated at existing restaurants. Second, they can open more restaurants. That's pretty much the playbook for every restaurant operation out there, and Chipotle is no different. The second path to growth is the one that's probably most compelling when it comes to this particular operation.
Image source: Getty Images.
Chipotle has roughly 3,500 locations. That's a lot of locations and Chipotle has grown massively over time. In 2024 alone it hopes to open as many as 315 new units. But how big can Chipotle really get? That's hard to answer, but if you look at fellow Mexican-themed fast food brand Taco Bell, owned by Yum! Brands, you can at least get a rough sense of the path forward. Taco Bell has 8,500 locations. That's 5,000 more than Chipotle, suggesting that there's at least another decade of growth ahead for the brand. That's good news if you are thinking about buying the stock.
2. Chipotle's bad news could get worse
Chipotle made headlines recently because its highly respected CEO, Brian Niccol, jumped ship to head up Starbucks. That has Chipotle investors worried about what happens to the company under new leadership. It's not an unreasonable concern, but Niccol didn't work in a vacuum. He had a team around him that is largely still in place. Chipotle will probably be fine.
But there's likely to be some additional bad news here at some point soon. That's because in the second quarter, same-store sales, the first way to grow referenced above, came in at a huge 11.1%. That's a shockingly high number in the restaurant space and isn't likely to be sustainable.
Low single-digit percentage growth in same-store sales is usually considered a good outcome. To be fair, Chipotle has been doing much better than that for a while now. But when same-store sales revert to a lower level (the figure was "just" 5% in the third quarter of 2023), investors could view it as the business faltering. In reality, Chipotle will still be performing well relative to the broader restaurant space. It will just be performing less well than it was previously.
3. Big stock price fluctuations aren't unusual at Chipotle
All of that said, Chipotle is now 20% below its 52-week high and also its all-time high. The drop could keep going. The shares have declined 50%, or more, three times since the company came public. The initial public offering was in 2006, so that's a lot of volatility in less than 20 years. But the truth is that this is a high-growth company and it isn't unusual to see such dramatic drawdowns for high-growth companies.
If same-store sales slow or there's a recession, this 20% drop could turn into something much worse. However, for the successfully growing company, each previous pullback has turned out to be a good buying opportunity. You just had to be willing to grit your teeth amid the negativity in the market. So, right now, it appears that the market is giving you an opportunity to buy Chipotle again. But that doesn't mean the opportunity won't get better if you wait. Perhaps the best choice would be to go with a starter position that you add to over time, particularly if the stock declines further.
Another shot at Chipotle, if you can handle it
It doesn't seem likely that you've missed the opportunity to buy fast-growing Chipotle. That's because the 20% drawdown has, basically, opened up another chance for you to get on board. But go in understanding the stock history here and the business backdrop. There could be more downside before Chipotle's drop turns into a rally. However, if Chipotle can keep opening new locations at a rapid clip and put up just decent same-store sales numbers (think mid-single digits), more growth is definitely in the cards. That's likely to bring investors back to the stock, eventually.
Should you invest $1,000 in Chipotle Mexican Grill right now?
Before you buy stock in Chipotle Mexican Grill, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Chipotle Mexican Grill wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $716,375!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 9, 2024
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
