WARNING: Know this 1 key risk before buying Chipotle stock.

Investors clearly have a strong appetite for it, with the stock soaring 335% over the past five years. Chipotle Mexican Grill (C.M.G. 0.74%). This huge gain greatly exceeds both. S&P 500‘S and Nasdaq Composite‘S reportThe same goes for most of the “Magnificent Seven” components.

Despite macroeconomics Despite headwinds and uncertainty, this Tex-Mex restaurant chain has proven resilient. And this business is currently firing on all cylinders.

But don’t rush to buy the stock just yet. There is one major risk that cannot be missed.

fast growing business

As with the consistency of its popular burritos and bowls, Chipotle once again crushed analyst estimates last quarter. This is becoming a common occurrence. For the three months ended December 31, the company reported sales and Diluted earnings per share There was an increase of 15.4% and 27.3%, respectively, compared to the same period last year. This helped boost the stock price immediately after the news.

Same-store sales increased 7.9% in 2023, driven by strong transaction growth. This is very encouraging to see. inflation pressure That doesn’t seem to stop Chipotle customers from frequenting the store. This shows the tremendous value they see in the food the company offers.

On the profitability side, things continue to improve. The company posted the following: operating profit margin It increased to 15.8% last year from 13.4% in 2022. Because Chipotle has large fixed costs such as rent and labor, it can profit more from economies of scale over time. Continuous menu price increases also help margins.

Thanks to Chipotle’s strong underlying momentum, Wall Street couldn’t be more bullish. Analysts expect revenue to grow at a CAGR of 13.8% over the next three years and adjusted EPS to grow 20.3% per year.

price for perfection

If you just look at the underlying business and performance, it’s hard to find anything to dislike about Chipotle. The company is thriving.

But that doesn’t mean you don’t need to buy stocks right now. Critical investors also evaluate the valuations offered by the market. After making huge profits, the stock is now Deliver price-to-profit ratio The (P/E) ratio is 49.2. In my opinion, this means Chipotle is priced for perfection.

Astute investors will be quick to point to Chipotle’s fantastic growth profile as reason enough to justify its steep P/E multiple. Management is doing a good job providing an optimistic outlook for shareholders.

“I am more confident than ever that we have the right people and the right strategy to achieve our long-term growth goals of 7,000 restaurants in North America, reaching $4 million AUV, growing industry-leading margins and revenue, and achieving our goals. . creating a better world globally,” said CEO Brian Niccol.

As of the end of last year, the number of Chipotle stores was 3,437, with average annual sales of $3 million. Clearly, there’s still plenty of room for expansion, according to management.

I have no doubt that Chipotle can achieve its goals. But I still think the stock is overvalued.

Let’s say Chipotle reaches 7,000 locations, has annual revenue of $28 billion, and earns a 20% profit margin. net profit margin To be clear, this means the company is opening stores at a faster rate than in the past. And margins will be significantly higher than the 12.4% reported last year, which was Chipotle’s all-time high.

The current market capitalization is $71.7 billion, which is 12.8 times the 2033 net profit forecast of $5.6 billion. So, for the stock to double over the next 10 years (a return that lags the historical performance of the S&P 500), investors would need a P/E 10 years from now that is roughly above the market’s 25. Chipotle needs to grow and become profitable like never before, and there’s no room for trouble along the way.

This makes me seriously question whether the stock is a smart buy today. Your best bet is to wait for a more attractive entry point.