The trend towards very expensive stocks could be good or bad, depending on whom you ask. Just look at Chipotle Mexican Grill (NYSE:CMG).
The rich valuation in Chipotle stock might be entirely justified, or it could be fueled mostly by hype, hope and fear of missing out on more gains after a massive run-up in the share price.
There’s something special on a psychological level about the $1,000 price point in the stock market. Perhaps that’s a significant milestone simply because the number ends with several zeros.
Regardless, Chipotle stock bulls would no doubt love to see a strong and sustained break-and-hold of that price level. But informed investors need to slow down and consider whether such a lofty valuation really makes sense.
If so, then by all means, let the price-action party continue throughout the summer. But if not, then caution is advised and a breach of the $1,000 level shouldn’t be a cause for celebration.
A Closer Look at Chipotle Stock
Given the current share price, it’s almost impossible to imagine that Chipotle stock once traded below $50. Back then, the idea of Chipotle shares trading at $1,000 apiece was almost laughable. But here we are, and the longtime bulls have been more than vindicated at this point.
Interestingly though, the sellers were actually in control for a couple of years. In particular, the period from July 2015 to October 2017 marked a significant decline in CMG share price. That suggests the possibility of future multi-year bear markets for Chipotle stock.
But don’t get the wrong idea, as bulls are fully in control now. The price dip induced by the spread of the novel coronavirus is in the rearview mirror now. Patient investors have recovered their losses and more. They’re winning, at least for now.
Drivers of Growth for Chipotle
Prior to the onset of the coronavirus, Chipotle wasn’t widely considered an e-commerce company. But the pandemic has forced many restaurant chains to shift their business models. Due to stay-at-home and social-distancing guidelines, many customers prefer to order their food online and have it delivered or pick it up for takeout.
As a result, a number of businesses, including Chipotle, have been practically forced to prioritize their e-commerce programs. To this end, Chipotle’s redesigned online-ordering site is very simple and therefore more customer-friendly.
In another e-commerce-friendly move, Chipotle has enabled online-payment options for customers requesting catering from the Mexican-food chain. Additionally, Chipotle has partnered with a number of third-party providers to facilitate food deliveries.
The company’s first-quarter data indicates that Chipotle’s aggressive push to boost online sales may be working. Indeed, $372 million in quarterly digital sales represent a whopping year-over-year 81% year-over-year increase. And those digital sales account for 26.3% of Chipotle’s total sales.
A Focus on Safety
Thus, Chipotle’s high stock price could be interpreted as an expression of Wall Street’s bullishness on the company’s e-commerce business. That makes sense, though investors might question whether this aspect of Chipotle’s business can continue to expand at such a rapid pace.
There’s also the question of safety, which is on people’s minds due to the pandemic. As you may recall, in 2018 Chiptole garnered negative attention when almost 700 people reported gastrointestinal issues, possibly caused by a bacterial infection, after they had eaten at a Chipotle restaurant in Ohio.
People have short attention spans, but that negative publicity stuck for a while. Fortunately, nowadays Chipotle is being extra-proactive in emphasizing safety. For instance, the company conducts wellness checks at its restaurants prior to every shift.
Chipotle has also made trained nurses available so they can evaluate workers’ health while they’re on the job. Plus, the company has installed air-purification systems, which could potentially diminish the risk of viruses.
The Bottom Line
So, is Chipotle stock truly worth $1,000? That’s one expensive burrito, but the traders put it there and for now, that’s its value.
Investors had just better hope that Chipotle’s big bet on e-commerce and its focus on safety measures will be enough to justify such an inflated valuation going forward.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.