Chipotle’s stock is at an all-time high. Is it too late to invest?

Without a doubt one of the biggest growth stocks in the restaurant business. Chipotle Mexican Grill (CMG 0.19%). This is often associated with high growth and success, and high numbers serve as a benchmark for other businesses.

Investors are often willing to pay a significant premium for companies like Chipotle, and this is evident in their valuations. The current stock price has risen about 40% this year, reaching an all-time high.

But will valuations eventually become so rich that it’s time to get your hands on the stock, or could it still be a good buy?

Business is still booming

While many fast food restaurants have struggled to grow recently, Chipotle is still going strong. In the first three months of 2024, revenue rose 14% to $2.7 billion. And comparable store sales (comps) also increased 7%.

While Comps measure revenue for restaurants that opened a year ago, opening a new location can increase overall revenue, making it a more relevant metric for restaurant inventory. Reporting high single-digit growth is encouraging for Chipotle investors. This is especially true when the economy is less than ideal, with inflation weighing on consumers.

Not only has the company been growing its sales, but it has also significantly strengthened its bottom line over the years. Last quarter, diluted earnings per share were $13.01, a significant improvement of 24% compared to the same period last year. Strong revenue growth is part of a long-term trend for Chipotle.

CMG revenue (quarterly) data from YCharts.

Is Chipotle’s valuation too high?

There’s no denying that Chipotle is a great growth stock. The company achieved outstanding performance even in difficult economic times.

However, investors should always consider the valuation of a stock. That’s because it can have a significant impact on the returns a stock can generate. A high multiple means the investor is paying a lot for future growth, and it may take years for the investment to generate strong returns.

Chipotle’s stock currently trades for nearly 70 times trailing earnings. However, investors have paid higher multiples for stocks in the past.

CMG PE ratio data from YCharts; PE = Price to Earnings.

But paying such a steep multiple for a stock growing 14% seems excessive. Correction may be delayed. And the stock’s price/growth ratio (PEG) of 2.7 also suggests that valuation has become a bit extreme.

PEG takes into account the earnings growth analysts expect from a business over the next five years. Anything below 1.0 is considered a good buy, anything above that means the stock is more expensive.

Should you buy Chipotle stock today?

Chipotle has a strong brand and can grow profits without compromising profitability, which is great for investors. However, with the economy still far from ideal, growth could slow in the future, which could put downward pressure on stocks.

News of the recent stock split has sparked interest, but investors shouldn’t count on the momentum continuing if the results aren’t still strong. At these high valuations, investors are expecting strong, sustained growth. And if that doesn’t happen, the stock may be vulnerable to a selloff due to its high valuation.

Chipotle can still be a good long-term investment, but with its stock price likely nearing its peak, there may be better options for investors right now.