Chipotle Stock Forecast & Analysis: Is CMG a Buy?

Written by Sean GraytokUpdated: 8th May 2022
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Find out if CMG is a buy in this Chipotle Stock Forecast & Analysis.

Chipotle Stock Forecast: Background 

Chipotle Mexican Grill, Inc. is a chain of fast-casual restaurants with locations in the United States, United Kingdom, Canada, Germany, and France.

The restaurant specializes in tacos, burritos, and rice bowls made to order in front of the customer.

The next section explores how these burritos can impact your investment portfolio.

Chipotle Stock Forecast: Investment Potential

#1. Chipotle Is Good at The Easy Thing

On The Compound and Friends podcast, Dan McMurtrie said to pay attention to companies that should get disrupted but do not.

Chipotle fits this model — it serves Americanized Mexican food. There are plenty of Mexican restaurants and even more casual grab-and-go options.

But Chipotle’s version of serving Mexican food is what people love and what keeps them coming back.

Chipotle’s process is the best, from the customer’s first feeling of hunger to a stuffed stomach.

Consumers have chosen the restaurant with a straightforward menu, transparency, and high-quality ingredients.

This shouldn’t work as well as it does — so pay attention.

#2. Chipotle’s Digitization

Another differentiator for Chipotle is the way that it leverages technology.

To redefine ‘fast-casual,’ Chipotle is incentivizing the use of its mobile app in a variety of ways.

In March, it launched the digital-only quesadilla to increase online sales. The CEO said that one in 10 transactions includes a quesadilla order.

Additionally, 45 of the 56 new locations opened in the quarter have a “Chipotlane,” a drive-thru lane for digital order pickup only.

These initiatives helped fuel a 10.5% spike in digital sales for the quarter. The mobile app now accounts for nearly half of Chipotle’s sales.

Not to mention the app’s role in customer retention. People don’t delete apps, especially ones that have their credit card info and can bring them food.

If you ask Chipotle, they’re digitizing to improve ‘value and convenience’ on the front-end customer experience. But it’s all about automation and leverage on the back-end.

#3. Chipotle’s Automation and Leverage

In a fast-casual setting, why have a human take orders when an algorithm can do it better? Is that the best use of the employee’s time?

Automation frees up the employee to complete tasks that algorithms cannot yet do at scale, like peel and cut avocados.

Automation, in the form of the mobile app, introduces leverage to Chipotle’s system by enabling a disproportionate output given the input.

Let the algorithms handle the routinized tasks and let the humans handle everything else.

Automation can mitigate one of Chipotle’s biggest risks: a labor shortage (we will discuss this concern later in the article).

Additionally, asynchronous ordering increases sales. We’ve all made plans to get Chipotle, only to arrive and see a line out of the door. The optics alone turn away business.

Digital ordering takes the ‘line’ out of the physical world and puts it in the cloud, which we can’t see – at least in the same way we perceive a physical line.

Fractional improvements in unit economics will generate massive returns for Chipotle when done collectively.

#4. Starbucks of Burritos

Is Chipotle the Starbucks of Burritos? Probably not, but let’s examine their similarities.

Chipotle found a way to sell $17 burritos the same way Starbucks found a way to sell $7 coffees.

They each have powerful branding and are transparent with their preparation and ingredients.

It is not unique for a coffee shop to ‘prepare’ your order out in the open, but it is unique for them to write your name on the cup and personalize the experience.

Chipotle achieves a similar relationship with the customer by preparing the ingredients out in the open for all to see.

This also contributes to Chipotle’s quality control; employees are incentivized to not cut corners because the customers are watching.

The next similarity is physical store design. Take away the logos at each company’s new stores, and it’s difficult to tell if it’s a Chipotle or Starbucks.

Also, Chipotle and Starbucks appear to have found the balance between adding new products without compromising core offerings and consistency with the customer.

New products are good for marketing, but each company has been quick to pull those that aren’t working.

While this section is more focused on business strategies than potential returns in your portfolio, a Starbucks (SBUX) comparison is hard to come by. Chipotle has earned it.

At the end of the day, none of this matters if the product is bad. Chipotle does the thing that’s most important for its long-term success: it makes a great burrito.

Chipotle Stock Forecast: Economic Moat

The following is our attempt to describe Chipotle’s moat:

Fast Casual At Scale + Quality Ingredients

Multiplication may be more appropriate than addition when it comes to economic moats.

Nonetheless, Chipotle’s differentiators discussed in the first section of this article are at scale.

Combining this with high-quality ingredients makes Chipotle a difficult business to replicate.

Restaurants might achieve ‘Fast Casual At Scale’ or ‘Quality Ingredients,’ but it is extremely challenging to achieve both.

Its main competitor has to give away free chips to compete. People go to Moe’s to take a break from Chipotle.

No restaurant is going to beat Chipotle at being Chipotle.

Chipotle Stock Analysis: Q4 Earnings

Chipotle reported Q4 2021 earnings on February 8th, 2022. Here are the highlights:

  • EPS: $5.58 vs $5.25 expected
  • Revenue: $1.96 billion vs $1.96 billion expected
  • Net income: $133.48 million 
  • Net sales rose 22% to $1.96 billion, which met expectations

Shares popped as much as 8% after the release.

CEO Brain Niccol shared the company’s strategies to combat rising costs in beef, avocados, and freight: increase menu prices. 

Chipotle raised menu prices by 6% in 2022. However, customers are paying about 10% more for their orders compared to the same period from a year ago. 

The company’s revenue guidance aligned with the analyst’s expectations, which was probably the primary driver behind the stock’s move after-hours.

Chipotle Stock Forecast: Competitors

Chipotle is a category leader amongst fast-casual restaurants but still faces viable competition. Here are Chipotle’s top competitors:

  • Moe’s Southwest Grill
  • Qdoba Mexican Eats
  • Baja Fresh Mexican Grill
  • Sweetgreen
  • Shake Shack (SHAK)
  • McDonald’s (MCD)
  • Taco Bell (YUM)
  • Panera Bread

We kept the list specific to the fast-casual dining sector, but Chipotle faces indirect competition in other areas, too.

There is an infinite number of options when it comes to having lunch or dinner. You could make the case that Chipotle competes with each and every one.

In terms of valuation, Chipotle trades at a forward P/E of 75.8. This suggests that shares of CMG are overvalued relative to other names in the space; Domino’s Pizza (DPZ) trades at 39.4, McDonald’s at 28.5, and Yum! Brands at 32.1.

You’ll have to pay a premium to benefit from Chipotle’s growth story.

Chipotle Stock Forecast: Risks

#1. The Guac And Everything Else is Extra

Even with high levels of unemployment, there’s been a labor shortage following the pandemic year. Companies that pay hourly-wage jobs are struggling to find workers, including Chipotle.

This caused Chipotle to increase its hourly wage by $2 for employees, bringing the crew average up to $15 an hour.

Additionally, Chipotle workers are being offered a $200 referral bonus for employees and $750 for managers.

Chipotle increased menu prices by 4% to cover the cost of the increased wages and hiring incentives.

It’s unlikely that a 4% increase will turn customers away in the short term, but Chipotle has to corral its labor shortage before a chicken bowl costs $31.

Chipotle’s Q2 2021 earnings results noted that “wage inflation for one month of the second quarter” partially offset margins.

This suggests that Chipotle views rising wage inflation as transitory instead of permanent.

That may be true in some areas of the economy, but reducing employee wages in 2024 will not happen.

Chipotle Stock Allocation in Your Portfolio

While optimal allocations are unique to each investor, the following questions might help you determine the right amount of CMG stock to buy if any:

  • What would cause people to stop going to Chipotle?
  • Are there long-term downsides to Chipotlanes?
  • Can Chipotle maintain its quality as it grows and opens more restaurants?
  • Does Chipotle have to find a balance between digital and in-person orders?
  • Will rising menu prices turn away customers?
  • Is there better investment potential for stocks in the cloud computing, financial technology, or artificial intelligencespace?
  • Does Chipotle compete with traditional fast food places or sit-down restaurants? Both? Neither?
  • Will wage inflation stick around and eat away at margins?

Chipotle Stock Forecast FAQs

Should I sell Chipotle stock?

Deciding whether or not to sell Chipotle stock depends on a variety of factors. Do you need liquidity right now? Are you sitting on major gains? Losses? Do you have other investment ideas?

Why is Chipotle stock so high?

Chipotle stock is so high because the company is significantly growing quarter by quarter and year over year. Not to mention that Chipotle is a high-quality company. In addition to its growth narrative in the dining sector, these factors have resulted in a premium to own shares of CMG.

Bottom Line: Chipotle Stock Forecast

According to CEO Brian Niccol, “Strong restaurant-level economics combined with significant restaurant growth should allow us to optimize earnings power for many years to come.”

That doesn’t always result in an increasing stock price, but it certainly helps.

Keep Reading:

This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and public equities research methodology to learn more about how we researched Chipotle stock.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and is a recognized expert in investing, financial management, and Bitcoin. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and companies who are driving technological innovation.