Many people will wonder if Chipotle (CMB) is the most overvalued stock in the universe.
Mr. Market paid $1,617.67 for Chipotle Mexican Grill (CMB) shares on 17 February 2023. Yet Chipotle reported $2.181 billion in quarterly revenues, a quarterly operating income of $296.33 million, and a quarterly gross profit of $522.54 million on 31 December 2022.
Hence, cynics will say Chipotle does not make much money. However, the burrito emporium offers impressive growth. For example, Chipotle’s revenues grew by 11.22% in the quarter ending on 31 December 2022.
Yet, the growth at Chipotle is not that great. For instance, its quarterly revenues grew from $1.961 billion on 31 December 2021. Plus, the quarterly gross profit grew from $396.02 million and the quarterly operating income grew from $158.30 million on 31 December 2021.
Is Chipotle worth $1617.67?
Skeptics will note that Chipotle’s value does not support a $1,617.67 share price. For example, Chipotle reported $6.927.50 billion in Total Assets and $889.14 million in cash and short-term investments on 31 December 2022.
Moreover, Chipotle’s cash and short-term investments are shrinking. CMG had $1.076 billion in cash and short-term investments on 31 December 2021.
So why does Mr. Market think Chipotle (CMG) is worth $1,617.67? Chipotle’s growth is a possible explanation. The number of Chipotle Mexican Grills rose from 2,622 in 2019 to 2,768 in 2020 to 2,966 in 2021, Statista estimates.
Chipotle opened its 3,000th Mexican Grill in Phoenix in February 2022, CNN Business reports. Interestingly, CEO Brian Niccol thinks Chipotle could add 4,000 more grills in North America.
“Over the long term, we now believe we can operate at least 7,000 Chipotle restaurants in North America, up from our prior goal of 6,000,” Niccol told analysts in February 2022.
How Far Can Chipotle Grow?
Niccol thinks Chipotle can expand to smaller communities with populations as low as 40,000 people, CNN reports. For example, cities such as Hobbs, New Mexico, (population 40,508).
I think the only way Chipotle can achieve that goal is to offer franchises. However, Chipotle has not sold franchises since 2006. Supermoney estimates a Chipotle franchise could cost $1.4 million in 2023.
Yet Chipotle could be profitable. Supermoney estimates each Chipotle location generates $2.2 million in revenues a year and has a 22% profit margin. Hence, I calculate each Chipotle makes an annual profit of $484,000. Furthermore, I calculate 7,000 Chipotles could generate $15.4 billion in revenues and $3.338 billion profit if Supermoney’s estimates are accurate.
Where can Chipotle Expand?
Hence, Niccols’ claims could be accurate if smaller city residents will pay $6.50 to $7.50 for burritos and $2.40 to $2.75 each for tacos. Yes, the food is delicious, but it is pricey.
Asking a New Yorker or a Denverite to pay $7.50 for a takeout burrito is easy. It could be harder to get a Minot, North Dakota, or a Phenix City, Alabama, resident to pay $7.50 for a burrito.
I predict Chipotle (CMG) will have trouble selling burritos in working-class cities and places with poor economies. Culture could play a role. Chipotle is an urban brand people associate with liberal big cities. I think CMG could face a backlash in working class red states.
Notably, many aspects of urban culture are under fire from Republican politicians and Fox News pseudo intellectuals. In particular, some conservatives and working-class people could view Chipotle’s natural and animal cruelty free food as elitists. Others will dislike Chipotle’s support for Hispanic immigrants.
Another danger Chipotle faces is anger from owners and supporters of neighborhood restaurants who see it as a threat. Yet, Chipotle’s food is good and it can attract enormous crowds in working-class communities such as Pueblo, Colorado.
How Much Cash is Chipotle Generating?
Interestingly, Chipotle (CMG) generates less cash. For example, Chipotle’s quarterly operating cash flow fell from $438.42 million on 31 December 2021 to $401.57 million on 31 December 2022.
Similarly, the quarterly ending cash flow fell from $97.23 million on 31 December 2021 to $11.37 million on 31 December 2022. Notably, Chipotle’s quarterly ending cash flow rose to $646.74 million on 31 March 2022 but fell to -$154.23 million 30 September 2022.
Chipotle is paying off more debt. For instance, its quarterly financing cash flow fell from -$182.04 million on 31 December 2021 to -$206.67 million on 31 December 2022.
Conversely, Chipotle’s total debt grew from $3.521 billion on 31 December 2021 to $3.729 billion on 30 September 2022. Tellingly, they reported no total debt numbers for Chipotle on 31 December 2022.
Is Chipotle’s Growth Unsustainable?
Thus, Chipotle (CMG) has less cash and more debt. Numbers show the growth is not generating more cash at Chipotle.
Consequently, I think Chipotle’s growth could be unsustainable. To explain, I believe Chipotle will have to borrow enormous amounts of debt to finance that growth.
This could lead to collapse if Chipotle cannot generate enough cash to pay off the debt. Moreover, any drop in burrito sales could make it hard for Chipotle to pay debts.
I think Chipotle should halt growth for a while. Instead, I recommend Chipotle try to increase cash flow at its existing stores instead of grow. Ways to increase cash flow could include adding new products to the menu or cutting expenses.
Can Ghost Kitchens save Chipotle (CMG)?
An interesting cash generating strategy Chipotle (CMG) is experimenting with is ghost kitchens. To explain, a ghost kitchen is a restaurant with no table service. Instead, the ghost kitchen cooks food for takeout and delivery.
Chipotle is experimenting with its version of a ghost kitchen, a “Digital Kitchen,” in Cuyahoga Falls, Ohio, The Verge reports. The Digital Kitchen will concentrate on pickup and drive thru.
An advantage to Ghost Kitchens is lower operating costs. For example, there’s no dining room to clean up and no drinks.
Another advantage of ghost kitchens is that are easier to automate. A company they call Jasper is experimenting with robotic ghost kitchens in Montreal. Jasper’s owner, YPC Technologies, claims to build robots that can cook thousands of recipes using fresh ingredients.
Hence, Chipotle could use YPC robots to automate its ghost kitchens and save money. A nightmare for Chipotle could be something like Jasper selling tasty burritos at a lower price. Notably, YPC claims to use fresh ingredients as Chipotle does.
My advice to investors is to avoid Chipotle (CMG) because I consider its stock astronomically overpriced. Moreover, Chipotle could be in an unsustainable expansion.