Down 32%, Is Chipotle a Once-in-a-Generation Investment Opportunity?

Key Points

• Chipotle missed analysts' expectations for revenue in Q2 as same-store sales fell.

• The company is still robustly profitable, and its long-term plans to significantly grow its store count are still on track.

• Chipotle shares haven't traded at such a low price-to-earnings valuation in years.

• 10 stocks we like better than Chipotle Mexican Grill ›

Chipotle Mexican Grill (NYSE: CMG) reported its financial results for the second quarter on Wednesday afternoon, and the market was disappointed, to say the least. The company's adjusted earnings per share matched Wall Street's estimates, but its revenue of $3.1 billion was below expectations. From where they closed on Wednesday, shares fell by more than 14% in the following session, and were still down by more than 12% as of late afternoon Friday.

This restaurant stock has still been a rewarding holding for its long-term investors, as it has climbed 102% in just the past five years. But some pessimism has taken hold, and it currently trades 32% off its peak. Does this setup make Chipotle a once-in-a-generation investment opportunity?

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Not satisfying investors' appetites

In the past few years, especially since the onset of the COVID-19 pandemic, Chipotle has put up some impressive financial performances. That's why its recent weakness warrants a deeper dive.

All retail and restaurant chains focus intensely on growing same-store sales (aka comps), as that indicates their ability to drive revenue gains from existing locations. Chipotle posted same-store sales growth of 7.9% in 2023 and 7.4% in 2024. But in the first quarter of this year, its comps declined by 0.4% year over year, and in Q2, they fell by 4%. Management has downgraded its guidance to say that it now believes Chipotle's same-store sales for the year will be flat.

Foot traffic, as measured by number of transactions, fell by 4.9% in the second quarter. This followed a 2.3% drop in Q1. This is certainly what's causing investors to lose confidence. The current macroeconomic environment isn't helping the situation.

"I think much of what we're experiencing right now is due to macro, and the consumer, the low-income consumer, is looking for value," CEO Scott Boatwright said on the earnings call. Weak consumer sentiment is a drag on the business. "I think that's probably the biggest headwind we face," he said.

Don't forget the positive attributes

It would be easy for investors to get caught up in the recent struggles of this company. However, while they definitely deserve some attention, it's important to focus on Chipotle's favorable traits. And its long-term prospects remain bright.

This is a profitable enterprise that's a gold-standard operator in the restaurant industry. Chipotle's restaurant-level operating margin -- a metric that strips away corporate overhead costs to highlight how the front-line stores are doing -- came in at a superb 27.4% in Q2. The business has also emphasized operational efficiencies. Most recently, that has meant leveraging innovative tools, processes, and technologies to boost productivity at its restaurants.

Even amid the recent sluggishness, Chipotle has continued to expand at a rapid clip. So far this year, it has opened 113 net new stores. It plans to end 2025 having added 330 new locations to its footprint. Given its restaurant-level profitability and its average annual unit sales volume of over $3.1 million, it makes sense that management has kept its foot on the gas pedal.

There are now 3,839 Chipotle stores in total. However, the company aims to be much larger in the future. Management reiterated its target of having 7,000 locations in the U.S. and Canada one day. Revenue and earnings will be substantially greater at that level of scale.

Trading at a five-year low

Chipotle was once a high-flying stock. In the five years leading up to its all-time high in June 2024, shares rose by an awe-inspiring 368%. As a result of this performance, its valuation was too steep, in my view.

That situation has changed. Investors can scoop up shares today at a price-to-earnings ratio of about 40. This is the cheapest valuation multiple that the stock has traded for since July 2020. I wouldn't go so far as to say Chipotle is a once-in-a-generation opportunity, but investors should still consider buying shares.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short September 2025 $60 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.