Chipotle is one of the most popular fast-casual restaurants in the U.S. It also has a really high stock price compared to other competing restaurants. Why is Chipotle stock so high?
Chipotle’s stock remains high because it has produced value for its shareholders. This worth was translated to an elevated cap, which resulted in a higher share price. This franchise brand only has 27.89 million shares giving it a higher share price because of its apparent exclusivity.
But some financial analysts say that Chipotle stocks are overvalued. As a result, the return of these stocks can be considerably lower than its future growth. Chipotle’s growth over the past three years has averaged about 10.4%.
Read on to learn more about the reasons why Chipotle stock is high, how to evaluate its worth properly, and if it is overvalued or not.
Why Is Chipotle Stock So High?
One reason why Chipotle stock is very high is that the company has built value for its shareholders. This translates into an elevated market cap, which results in a higher share price. This franchise brand has only 27.89 million outstanding shares. It gives the impression of exclusivity, which also contributed to the increase in the value of its share price.
Some financial analysts say that the company’s worth is greatly overvalued. That is why they believe that the long-term return of its stock will be potentially much lower compared to its future growth. In the past three years, the company experienced an average of 10.4% growth. Its growth estimate for the next three to five years is about 13.61%. 
Chipotle’s P/E ratio is also high. This indicates the company’s high potential for growth. This is the belief of investors that lots of future positivity are very likely for the company. They expect that the earnings and revenue will grow faster than its competitors and the market.
The Main Reason for High Chipotle Stock
In real-world terms, perhaps Chipotle’s stock is high, is the confidence of its investors in its ability to overcome the hurdles and obstacles that come its way. Inevitably, problems come to any business entity at any point in its life.
Chipotle was able to bounce back from a previous slump and again enjoyed sales growth and solid earnings. In the recent past, it was able to rise from a fall triggered by food safety concerns using new leadership and beefed-up marketing promotion. The company showed it is resilient, and it seems its investors took careful notice.
Before the Covid-19 scare hit, Chipotle already had the wherewithal to overcome any storm that would come its way. This company could deal with different forms of outbreaks in its storied 27 years of serving fast food items to its customers.
It has overcome different outbreaks through the years, such as salmonella, hepatitis, norovirus, and several E. coli contaminations. So, Covid 19 is not its first viral encounter. It could even hurdle non-physical virus attacks such as the cyber-attacks launched against it in the past.
Additionally, this franchise brand can always grow despite being in an industry populated by strong competitors. Many of its rivals were struggling while the coronavirus was roaming around.
But Chipotle has already developed a system that can provide its customers sanitary food items that they can safely consume. The company’s share prices have returned to their pre-Covid 19 trajectories. Effectively, share prices are bucking the trend in the industry inadvertently putting the company in the spotlight.
Another Way of Looking at Chipotle’s Current Share Prices
This is good advice from a financial investor: When buying stocks, it is wiser not to focus your attention on their prices. A better way is to focus on the company’s market cap. Currently, Chipotle’s market cap is around $28.8 billion. To get this figure, multiply the share price by the shares outstanding.
Chipotle Has Created Value for Its Investors or Shareholders
As it is, this company has created value for its investors or shareholders. This resulted in a higher market cap, and consequently, a share price that is also higher. Chipotle only has 27.89 million shares outstanding.
This seeming exclusivity is also one of the reasons for its higher share price. The company has also been topping its earnings every quarter. This also led to the company’s higher market cap.
It Seems High Because of the Way People Look at Stock Values
Another financial analyst believes that Chipotle’s stock price is not high. They say that it seems high because of the usual way people look at stock values. This analyst says that just because a stock is priced at $300, it is already expensive.
A stock costing $20 might be more expensive, says this analyst. Going back to the formula of Market Capitalization = shares outstanding x stock price, a $20 stock may have much, much more shares outstanding. From an expected earnings perspective, this stock could be even more expensive.
This analyst also stated that if you evaluate the worth of a stock by its price, you have not really understood the stock market. Added to this, Chipotle does not have any short or long-term debts. It has also financed all of its assets with equity.
So, is it wise to buy a Chipotle stock? When he opened the first Chipotle store in Denver, Colorado, in 1993, Steve Ells, the founder and executive chairman of the company, envisioned a niche.
Now, Chipotle is one of the most successful restaurant IPOs of the 2000s. Currently, it operates more than 2,500 outlets across the globe. It was able to generate approximately $5.6 billion in 2019.
Why Chipotle’s P/E Ratio Is High
The price-to-earnings (P/E) ratio of a company is one of the financial metrics that investors and analysts use to assess the value of a stock. It is also an indicator of the company’s financial health. Basically, it is the company’s current share price divided by the earnings per share. If the ratio is high, the numerator must be high, or the denominator must be low, or a combination of both.
An analyst says that they cannot really say if Chipotle’s P/E ratio is high since they can’t compare it with similar companies. The reason is that other chains of restaurants with almost the same number of outlets are primarily franchise operations. Therefore, economic triggers can affect such restaurant chains’ stocks.
Two factors push the P/E ratio of Chipotle higher:
Rapid and Steady Growth
Chipotle has an enviable record of rapid and continuous growth. Wise investors are paying for future and not past earnings. If Chipotle’s future earnings are expected to increase, the share price divided by past earnings will appear high.
You can better appreciate how this factor affects stock value by an illustration:
Company A is operating without any debt. It has $1,000 worth of equity and is earning $50 a year. Its P/E ratio is $1,000/$50 = 20.
Company B is similar to company A, but it is funded by a $500 of 2% coupon debt and $500 of equity. After deducting $10 of interest payments, its net earnings are $40 per year. The P/E ratio of Company B is $500/$40 = 12.5.
Chipotle is in good business condition because it does not have any debt but also has a lot of cash. Now, let’s go back to the main focus of this article – why Chipotle’s stock price is so high.
Company A sold its shares and added $500 of cash to its balance sheet, which and earned 2% interest. Its income would increase up to $60, and the value of its equity will rise to $1,500. Company A’s P/E ratio would also increase. Its new P/E ratio will be $1,500/$60 = 25. As you can see, cash can increase the P/E ratio.
Chipotle’s Stock May Appreciate Further
Chipotle’s shares have increased by 3.62% in January of this year, more than triple their lows in 2020. But analysts say that three catalysts may even cause their further appreciation.
Christopher Carril, an analyst who focuses on Chipotle, has upgraded the company’s stock from Sector Perform to Outperform. The new price target increased from $1,320 to $1,650. There are three reasons for this projected increase in the stock price.
The eventual return of Chipotle to pre-Covid cost structures will enable the company to return to its near-peak profit margin levels. It is projected that by 2022, the margins at restaurant levels can be around 23% on $2.6 million AUV (average unit volume) versus 20% RLM (restaurant-level margin) at $2.0 million AUV of today.
Comp and Unit Growth
Chipotle has the potential to exceed the estimates of Street Financial Services for its 11% comp growth in 2021. This is due to the company’s new menu innovation and its market share gains. Its restaurants are now offering superior quality and value foods compared to its fast-food rivals.
When sales from comp stores are up, sales are increasing in the company’s current stores. Unit growth is the added number of units of a product in a given time period, compared to the number of sold units in a comparable time period in the past.
Chipotle also has the ability to directly target its digital loyalty members, which is now totaling about 17 million. So, the company is foreseeing an increase in its new unit growth from approximately 150 to about 200 units per year.
Investors searching for companies that exemplify ESG (environmental, social, and governance) principles could focus their attention on Chipotle. These are investors who practice sustainability investing. Chipotle provides the highest level of ESG disclosures among its competitors.
Some Say Chipotle Stock Is Overvalued
According to the GuruFocus Value Calculation, Chipotle stock is overvalued. GuruFocus gives an estimate of the fair value at which a company stock should be traded. They base their calculations on the analysis and growth estimates of business performance in the future, as well as the historical multiples that a stock has been traded at.
An overvalued stock refers to the stock price above the GF Value Line. The future returns of the stock will likely be poor. But if it is significantly below the GF Value Line, it will likely have higher returns in the future.
Why is Chipotle stock price so high? The current price of Chipotle stock is $1,427.33 per share with a market cap of $40.2 billion. In GF’s valuation, upon considering these figures, the Chipotle stock seems to be considerably overvalued.
Even after adjusting the company’s capital structure and growth, many fundamental analysts regard Chipotle stocks overvalued. So, they could be right or wrong, but still, investors are confident with Chipotle. It could also be that the market is right and the analysts are wrong. Chipotle must be hiding some value that is not apparent in its financial statements.
Others Say Chipotle Stock Is Cheap and Undervalued
In 2020, Chipotle stock’s value jumped almost 60%, leading many investors to wonder if the stock is expensive. Wedbush Securities believes that the company’s strong growth outlook means it really looks cheap.
There seems to be nothing that can stop Chipotle’s stock price from climbing higher since it reported its earnings in July 2020. That report sent company shares down temporarily. Jack Hartung, CFO of Chipotle, said that their stock is not really pricey. That is when investors think about the potential for long-term growth.
Nick Setyan, another investment analyst, said that given the potential acceleration level post-Covid compared to the growth rates pre-Covid, they believe that Chipotle’s stock is undervalued.
Conclusion: Why Is Chipotle Stock Price So High?
The stock of Chipotle is high because this company has produced worth or value for its shareholders. This worth has been translated by the company to an elevated cap, resulting in a higher share price.
This company’s stock is high because the Chipotle brand only has 27.89 million shares, which gives it a higher share price because of its apparent exclusivity.