The Chipotle Mexican Grill (CMG) stock price has come under pressure in the past few days as investors assess the impact of the CEO shakeup and its recent softening sales. After peaking at $70 in June, it has moved into a bear market, falling by about 20%.
Chipotle Mexican Grill’s growth concerns
The CMG stock price has done well in the past few years, helped by its strong store additions and revenue growth. Its annual revenue jumped from $5.5 billion in 2019 to over $9.8 billion in 2023 and $10.9 billion in the trailing twelve months.
This growth has been helped by the soaring number of locations in the United States. Its store count has risen from 2,491 in 2018 to 3,465 today.
At the same time, the company has embraced technology and tweaked the ordering process, with a substantial number of orders being filled online or through its Chipotlane. Additionally, it has increased prices of its top products. For example, the price of burritos has risen from $6.50 in 2019 to about $10.7, a 60% increase.
Still, there are now concerns about its growth trajectory as new store additions slow. The most recent results showed that Chipotle’s revenue rose by 13% in the third quarter to $2.8 billion, while its comparable store sales rose by 6.0%. Chipotle’s operating margin was 16.9%.
While the 13% revenue was a good one, it was also lower than what it was to a few years ago. Also, there are concerns about the number of stores that it can open and run profitably in the coming years.
Additionally, it is now having to pay more wages, especially in California, which has hiked restaurant wages recently. Labor costs in the last quarter stood at 24.9%, an increase it attributed to the state.
The other concern is that the company recently lost Brian Niccol who engineered its turnaround and now heads Starbucks. It is now led by Scott Boatwright who is the interim CEO. Analysts believe that he has the experience he needs to continue to run the company for a while.
There are other reasons why Chipotle stock price has jumped over time. Most notably, the management has continued to reduce its share count over time. It has reduced the number of outstanding shares from over 1.4 billion in May 2021 to 1.36 billion. It repurchased stock worth $488 million in the last quarter and authorized another $1.1 billion.
Read more: Chipotle shares up 10% after announcing its financials for the second quarter
Valuation concerns remain
The biggest concern for the CMG stock price is its valuation, which is substantial. Data shows that Chipotle has a forward price-to-earnings ratio of 50.58, much higher than the sector median of 18.
The non-GAAP forward P/E ratio of 50.56 is also higher than the sector median of 16.86. Also, the forward EV to EBITDA of 35, higher than the industry median of 11.
These numbers mean that Chipotle is more valuable than some of the most popular technology companies that are growing at a fast pace and have higher margins.
For example, Microsoft has a forward P/E ratio of 31 and net income margins of 35 compared to Chipotle’s 13%. Microsoft is also having faster growth than Chipotle.
Chipotle is also more expensive than Alphabet, which has a forward P/E ratio of 21.3. The same is true with other firms, including NVIDIA, which has become the biggest company in the world.
Still, despite these valuation concerns, analysts believe that CMG has more upside to go. The average estimate for the stock is $65.28, which is higher than the current $56.18. These analysts expect that Chipotle Mexican Grill’s revenue will be $11.32 billion this year, a 14.7% annual increase followed by $12.83 billion next year.
Some of the most bullish analysts are from Wedbush, TD Cowen, Citigroup, and Loop Capital.
Chipotle Mexican Grill stock price analysis
The weekly chart shows that the CMG share price peaked at about $70 earlier this year and formed an evening star candlestick pattern. In most periods, this is one of the most bearish chart patterns in the market, which explains why it has suffered a harsh reversal.
The stock has also formed a bearish flag chart pattern, a popular bearish sign in the market. It is characterised by a long vertical line and a rectangle pattern. The MACD and the Relative Strength Index (RSI) have also formed a bearish divergence pattern.
On the positive side, the stock remains above the 50-week moving average. Still, the stock will likely have a bearish breakout, with the next point to watch being at $48.10, its lowest point on August 12. A break below that point will lead to more downside.
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