Shares of Chipotle Mexican Grill (NYSE:CMG) have tanked in recent trading days as investors anticipated and then received a less-than-ideal earnings report from the quick-service chain.
Shares are down more than 23 percent in the last five days alone, and serious growth pressures on the business could keep them sold off for some time. Today, let’s look at why Chipotle stock went down and whether CMG could be a good stock to buy on the dip and hold in hopes of a future recovery.
Chipotle’s Earnings Report
The largest factor in the recent CMG selloff has been a lackluster Q3 earnings report. While overall revenue rose 7.5 percent in Q3 to a total of $3.0 billion, comparable restaurant sales rose at the extremely anemic rate of just 0.3 percent. These results constituted a huge downgrade in growth from the year-ago quarter, when total revenues rose by 13.0 percent and comparable sales were up 6.0 percent. Even more important for investors, Chipotle’s guidance for 2025 projects comparable sales declining by low single-digit percentages.
Restaurant-level operating margin also declined from 25.5 percent to 24.5 percent, a decline accompanied by a drop in overall operating margin from 16.9 percent to 15.9 percent. Despite these margin struggles, though, Chipotle did manage to deliver earnings per share of $0.29, up by a modest 3.6 percent from the year-ago quarter.
Chipotle also saw modestly fewer transactions in Q3, with 0.8 percent fewer total transactions across the chain during the quarter. This was more than offset, however, by a 1.1 percent increase in the average check. Even so, declining traffic could be a problem for Chipotle if the trend persists.
It’s worth noting that CMG shares were already selling off before the earnings report came out. This preliminary selloff appears to have been the result of expectations among investors that Chipotle would miss earnings estimates. Even with some negative expectations already baked into the price, though, CMG shares sold off dramatically in the aftermath of the earnings report.
The Role of Valuation
Though Chipotle’s growth is certainly slowing, it may seem odd that shares have fallen as much as they have while both revenues and earnings are still growing. This, however, is where CMG’s valuation appears to have worked against it. Chipotle has been one of the hottest restaurant stocks to own for the past several years, with extremely strong growth pushing shares to trade at high earnings multiples. For most of the last few years, CMG has traded at over 40 times earnings, at times going to P/Es of 60 and higher.
Even after the selloff, Chipotle is trading at a price that implies decent levels of future growth. CMG shares currently trade at 27.9 times trailing 12-month earnings, 3.6 times sales and 27.3 times operating cash flow. For comparison, the sector’s average P/E ratio is just 17.2.
While there could be additional downgrades to come in the wake of the Q3 earnings report, CMG has fallen to well below the average analyst price forecast as of the time of this writing. Shares of Chipotle are down to $31.69, more than 40 percent below the average price target of $44.61. So, while a high valuation may be working against Chipotle shareholders at the moment, analysts seem to remain convinced that the stock can still support high valuation metrics going forward.
Broader Headwinds for Restaurant Stocks
Chipotle certainly isn’t the only restaurant stock facing heavy pressure in today’s market. Other fast casual chains like Cava and Wingstop have experienced similar double-digit losses so far in 2025 as input costs have risen and consumers stretched by inflation and a less-than-ideal job market have cut back on eating out. Even more established chains like McDonald’s and Yum! Brands have only been able to deliver modest single-digit returns YTD.
Much of the pressure being put on fast-food restaurants comes from lower-income consumers dining out less frequently, a trend that is likely to persist until the pressures of higher prices on American consumers abate. Taking a longer-term view, though, history suggests that quick-service restaurant chains are resilient businesses that tend to recover well from such temporary macro pressures.
Is CMG a Buy on the Dip
While there’s little doubt that Chipotle is experiencing some growth difficulties tied to the macroeconomic landscape, there’s still quite a lot to like about the business. To begin with, Chipotle remains strongly profitable in spite of the headwinds it’s facing. Over the last 12-months, the business has delivered a net margin of 13.0 percent and a return on invested capital of 18.8 percent, both of which are quite high compared to the broader restaurant industry.
Chipotle’s selloff may also give it a prime opportunity to build shareholder value through buybacks. In Q3, Chipotle bought back about $686.5 million worth of its own shares at an average price of $42.39. The remaining buyback authorization of a little over $650 million could now be used to repurchase a significantly larger number of shares at what are now much lower prices.
As demonstrated by Q3’s earnings report, Chipotle can also keep its growth levels up by expanding its restaurant base. With comparable store sales virtually flat, almost all of the revenue growth Chipotle saw last quarter was driven by the opening of 84 new locations. The top brass still plans to open as many as 370 new restaurants next year, pushing revenues higher in spite of lagging comparable sales.
Overall, Chipotle still appears to be a strong business with good long-term prospects that is encountering macro headwinds that are impacting the entire restaurant industry. While the stock is still trading at a bit of a premium valuation, the current slowdown in growth could give long-term investors who are comfortable with volatility a chance to buy CMG at a fairly attractive price. Though Chipotle may not mount a full recovery until the macro outlook improves, the business itself is still delivering respectable results and could be a good one to own for the long haul.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.