Time to Buy Chipotle Before Its Massive Stock Split? | The Motley Fool (2024)

Here's why that is the wrong question to ask.

A lot of people seem to care about stock splits, so much so that we even have a dedicated calendar for them at The Motley Fool. A huge split is coming up for Chipotle Mexican Grill (CMG 0.72%), which is doing a 50-to-1 exchange, estimated to occur on June 26. Investors have gotten excited and sent shares of Chipotle close to all-time highs at around $3,000 a share.

I am here to tell you that stock splits don't matter. A stock is worth the future cash it will distribute back to shareholders, discounted back to today. For Chipotle, it is irrelevant whether it has one share that trades at a price of $80 billion (its current market capitalization) or 80 billion shares trading for $1. An investor will make money if the company generates more in earnings.

Forgetting the irrelevant stock split, how does Chipotle stack up when doing fundamental analysis? Should you buy the stock at current prices? Let's take a closer look and find out.

A lot of room for store count growth

As the premier fast-casual restaurant chain for Mexican grub, Chipotle now has 3,437 store units, mostly in the United States. Over the long term it plans to open 7,000 stores in North America, and it is starting to dip its toe into international markets. Specifically, it has a few stores opened in Western European markets, and just launched a partnership to bring Chiptole to Dubai and the Middle East.

While it is unclear how many locations Chipotle plans to build internationally, I think it is reasonable for the company to hit a few thousand at some point over the next decade or two, especially if it moves to other markets such as Australia. That would bring it to a total addressable market of at least 10,000 restaurants, which I don't think is crazy. McDonald's, for reference, has over 40k locations worldwide.

How much would this mean in sales? Today, the average Chipotle generates $3 million in annual sales, a number that has grown at a single-digit rate in recent years as the company keeps up with inflation. Eventually, Chipotle should hit an average restaurant sales level of $3.5 million. Apply that to 10,000 locations and you have $35 billion in annual sales compared to $10 billion today. Of course, there are many years of growth needed to hit these sales figures, but Chiptole has a clear line of sight to achieving these growth goals.

Can profit margins keep moving higher?

Okay, we have some estimates on Chipotle's sales potential. Now let's move to what really matters to investors: profits. Chipotle has done a great job in recent years to expand its operating margin, recovering back to 16.5% in the last 12 months. It has taken almost 10 years for the company to recover from its food-borne sickness outbreak, when profit margins were pushing toward 20%.

Over the long term, investors should expect some small levels of operating leverage as Chipotle further scales around the globe. Don't expand massive margins from a restaurant concept, though. There will always be major labor and food costs for Chipotle, which will likely keep its profit margins in the 15%-20% range.

Assuming Chipotle can hit an 18% consolidated margin at its $35 billion future sales estimate at 10k locations, the company will be generating $6.3 billion in annual profits at some point down the line.

Time to Buy Chipotle Before Its Massive Stock Split? | The Motley Fool (1)

CMG Operating Margin (TTM) data by YCharts

Don't worry about a stock split, focus on valuation

Again, investors shouldn't worry about a 50-to-1 stock split for Chipotle. It has no bearing on the intrinsic value of Chipotle, how many people are going to visit its stores, or any of its input costs. What matters is how much it will earn in cash for shareholders in the coming years.

I think Chipotle can generate over $6 billion in earnings once it hits 10,000 locations. At a current market cap of $80 billion, that would give Chipotle stock a cheap-looking price-to-earnings multiple (P/E) of 13. The problem is that it will take Chipotle many years to reach this earnings level. Even if it ups its store opening rate to 400 a year (it opened 271 in 2023), it will take Chipotle over 16 years to reach 10,000 locations worldwide.

This is not an overnight growth story like Nvidia. Chipotle is a good business, but one where 10-plus years of earnings growth is already priced in. Forget the stock split -- this is why you should avoid buying shares of Chipotle stock. The stock is overvalued right now and likely to disappoint investors who buy today.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool has a disclosure policy.

Time to Buy Chipotle Before Its Massive Stock Split? | The Motley Fool (2024)


Is now a good time to buy Chipotle stock? ›

Reasons to consider buying Chipotle stock

Chipotle's business is booming. In the fourth quarter of 2023, the company's revenue jumped 15.4% year over year to $2.5 billion. This increase wasn't just the result of Chipotle opening a record number of new restaurants. Same-store sales at its existing restaurants rose 8.4%.

Should I wait for a stock to split before I buy it? ›

Does it matter to buy before or after a stock split? If you buy a stock before it splits, you'll pay more per share than what it'll cost after it splits. If you're looking to buy into a stock at a cheaper price, you may want to wait until after the stock split.

When you own 100 shares of a $100 stock that splits two for one you will now own? ›

Let's assume that you currently own 100 shares in a company with a share price of $100. If the company declares a two-for-one stock split, you would now own 200 shares at $50 per share post-split.

Which shares will split in 2024? ›

Stock Splits 2024
Issuer CompanySymbolStock Split Date
Sunshine Capital LtdSCLMar 11, 2024
Manorama Industries LtdMANORAMAMar 08, 2024
Sunshine Capital LtdSCLMar 08, 2024
Capri Global Capital LimitedCGCLMar 05, 2024
27 more rows

Will Chipotle stock go up after split? ›

Shares of Chipotle gained following the news of the proposed split, and ended the week nearly 4% higher Friday from Monday's close, before the split was announced late Tuesday. Based on Friday's closing price of $2,882.04, Chipotle would trade at an estimated $57.64 per share after a 50-for-1 split at that price.

Will Chipotle stock split in 2024? ›

Chipotle's shares are expected to begin trading on a post-split basis at the market open on Wednesday, June 26, 2024.

When should I buy a stock split? ›

Buying before a split might mean purchasing at a higher per-share price, but you'll own more shares after the split. Buying after a split could be more affordable, with the potential for the stock to appreciate.

Why is a share of Berkshire Hathaway over $300,000? ›

How did the Berkshire Hathaway Class A shares become so expensive? It was a deliberate strategy by Warren Buffett to keep the number of shareholders low. When most companies increase in value, the corporation will “split” shares - give you two shares for each one you have, cutting the price in half.

Do you double your money when a stock splits? ›

When a company divides each existing share into 20 new shares, that also means that each share is now worth one twentieth of the original value. The market value of the company, however, does not change.

What is the stock 100 rule? ›

The general rule is that the younger you are, the more risk you're able to tolerate. The older you get, though, means you must cut back on the amount of risk in your portfolio. The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age.

Will Nvidia split in 2024? ›

In 2021, Nvidia stock was priced at $583.36 on the day prior to the company announcing its intention to split its stock. That's nearly $180 less than its current stock price, which provides strong support for the theory the company could split its stock in 2024.

What are the disadvantages of a stock split? ›

Disadvantages of a Stock Split

A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before. Not to forget, a company must invest some amount to conduct a stock split.

Which stocks will double in 10 years? ›

9 Best Growth Stocks for the Next 10 Years
  • DaVita Inc. ( ticker: DVA)
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  • Extra Space Storage Inc. ( EXR)
  • First Solar Inc. ( FSLR)
  • Gen Digital Inc. ( GEN)
  • Microsoft Corp. ( MSFT)
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Mar 27, 2024

What stock will boom in 2024? ›

2024's 10 Best-Performing Stocks
Stock2024 Return Through April 30
Trump Media & Technology Group Corp. (DJT)185.3%
Canopy Growth Corp. (CGC)191.2%
Super Micro Computer Inc. (SMCI)202.1%
Alpine Immune Sciences Inc. (ALPN)238.9%
6 more rows

What are the next big stock splits? ›

Upcoming and Recent Stock Splits
StockExchangeRatio Denominator
85 more rows

What is the future of Chipotle stock? ›

Chipotle Stock Price Forecast 2024-2025

Today, Chipotle traded at $3,155.38, so the price increased by 38% from the beginning of the year. The forecasted Chipotle price at the end of 2024 is $4,077 - and the year to year change +78%. The rise from today to year-end: +29%. In the middle of 2024, we expect to see $3,461.

Is Chipotle doing well financially? ›

As for the business itself, Chipotle is putting up record financial results with $9.9 billion of revenue and $1.2 billion of net income for 2023, up 14.3% and 36.7%, respectively. Comparable sales increased 7.9% for the year, while restaurant-level operating margin jumped from 23.9% to 26.2%.

Why is Chipotle stock falling? ›

Chipotle stock's slide in recent weeks likely has more to do with the market's general direction during that time than anything company-related. The “Fed pivot” enthusiasm of late last year has faded somewhat.

Why is Chipotle stock doing so well? ›

CMG's positive performance can be attributed to restaurant-level operating margin expansion, menu innovation, price increases, and good execution of the company's digital strategies. For 2024, management expects comparable sales growth in the mid-single-digit range and 285 to 315 new restaurant openings.


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