Chipotle Mexican Grill (NYSE:CMG) is a fast-casual restaurant chain that’s known for serving up big burritos. In the financial markets, however, some investors aren’t particularly interested in what Chipotle actually does. They might get trapped in a bad trade because of their obsession with the upcoming Chipotle stock split.
It’s stock-split season, apparently, as Nvidia (NASDAQ:NVDA) and Broadcom (NASDAQ:AVGO) generated a great deal of attention for their share-split announcements. Chipotle is joining the “big split” club, but investors should focus on its business first. A sharp drawdown may occur if the post-split share price remains high.
Chipotle’s Valuation Makes the Stock Vulnerable
On June 20, Chipotle stock fell 6.22% to $3,214.42, just a few days before the company’s highly anticipated stock split. There was no company-specific news on that day. So, what happened?
Barron’s speculated that “complaints about portions could be why” — but more on that topic in a moment. I’d suggest that there’s a more fundamental explanation, and it has to do with Chipotle’s sky-high valuation.
Just to recap, Chipotle Mexican Grill announced a 50-for-1 share split on June 6. The company’s common-stock shares will begin trading on a post-split basis on Wednesday, June 26.
Sure, this will make Chipotle stock more affordable. However, in a forward-looking and ultraefficient market, it’s very likely that the anticipated benefits of upcoming stock split have already been priced into Chipotle shares.
Maybe you’re not convinced that the stock-split benefits have been “baked into the burrito,” so to speak. If you’re skeptical, just consider that Chipotle’s GAAP-measured trailing 12-month price-to-earnings ratio is 68.61x. To provide some context for this, the sector median P/E ratio is 17.93x.
Chipotle’s Reputation May Be Suffering
When a stock is richly valued, it’s susceptible to fast and seemingly inexplicable drawdowns. Yet, valuation concerns aren’t the only reason to avoid Chipotle stock.
There are also reputational concerns to consider, and these concerns could impact Chipotle Mexican Grill’s business in 2024. During this frustrating time of high inflation and “shrinkflation” (in which food companies are perceived as shrinking their portions), budget-conscious consumers are being more selective.
That’s bad news as Chipotle’s reputation hangs in the balance. Multiple news sources, including The New York Times as well as Fortune and even Barron’s, have reported on some customers’ complaints about Chipotle’s portion sizes.
I looked far and wide to find evidence that Chipotle is making a strong effort to remedy the social-media backlash. All I found is this: Chipotle will give free burritos to selected promotion applicants during the championship basketball season.
That’s pathetic, but not quite pathetic as Chipotle CEO Brian Niccol’s suggestion that customers can get bigger food portions if they give the servers a certain “look.” It sounds to me like Niccol and Chipotle just aren’t taking the company’s reputational downward spiral seriously.
Chipotle Stock: Look for a Better Value
This may be a controversial take, but Chipotle Mexican Grill’s customers and investors should look for a better value. Niccol’s flippant response to customers’ complaints shouldn’t sit well with Chipotle’s shareholders.
Besides, a stock split doesn’t change a company’s value. It might make the company’s shares more affordable, but the market already knows this and probably already priced the perceived benefits into Chipotle stock. Consequently, I cannot comfortably recommend investing in Chipotle Mexican Grill right now.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
