While the rest of the industry took a major hit during the pandemic, Chipotle Mexican Grill (CMG -0.74%) was able to thrive. The popular Tex-Mex chain leaned heavily on its digital foundation to serve customers with mobile ordering for drive-thru and delivery. And now that in-store dining is back, management is optimistic that the long-term growth opportunity remains intact.
Yet, this top restaurant stock has started the new year already down 19% as the rest of the market takes a hit as well. So what's the outlook for Chipotle stock? Can it hit $2,000 in 2022?
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Keep the momentum going
Based on its current price of $1,350, Chipotle's stock would need to rise nearly 50% during the next 11 months to reach $2,000. From a fundamental perspective, a lot of positive things would need to happen.
For starters, the business needs to continue opening stores at a rapid pace. During the first nine months of 2021, Chipotle opened 124 net new locations, bringing the total footprint to 2,892 as of Sept. 30. Management believes North America can support 6,000 stores one day, so opening 200 or more locations in 2022 seems reasonable.
Being able to increase annual unit volume is another pillar of Chipotle's growth plan. As I alluded to earlier, the company has a fantastic digital offering that allows it to serve customers in the most convenient ways for them. Adding more Chipotle Rewards members, of which there are currently 24.5 million, will also boost engagement and repeat purchase behavior.
CEO Brian Niccol says that just 15% to 20% of consumers use both in-store and digital channels. Converting larger numbers of digitally native people to eat at a restaurant (and vice versa) will result in more eating occasions and help to drive higher sales per store.
Finally, Chipotle's profit needs to jump significantly in 2022 to support a meaningful gain for the stock. Wall Street analysts are expecting a 31.6% year-over-year increase in earnings per share, certainly a healthy clip. Over the past three quarters, the company has beat estimates. More financial results that positively surprise would add upside to the stock.
Don't bet on a $2,000 price target
Chipotle's operations seem to be humming along at full strength today, but we can't ignore the ongoing inflationary environment. While the business has shown its ability to raise prices historically for customers, costs are really soaring today. In the most recent quarter, 56.1% of Chipotle's operating expenses consisted of food and labor costs, categories experiencing huge inflation. The continuation of this trend will definitely add pressure to Chipotle's margins and earnings, which reduces the likelihood of outsized stock performance.
Right now, the odds are stacked against the stock hitting $2,000 by year's end thanks to higher input costs, but there's another macroeconomic factor at play as well. I believe stocks in general will have a tough year because of the Federal Reserve's intention to raise interest rates multiple times this year, especially following the S&P 500's strong performances in 2020 and 2021. The ultra-accommodative monetary policy that encourages investors to take on more risk is about to come to an end.
Chipotle already trades at a steep multiple with a current price-to-earnings ratio of 57. That's far higher than for peers like Domino's, McDonald's, and Starbucks. And even after the stock's drop so far this year, shares still look overvalued. As a result, I don't see the stock hitting $2,000 in 2022.
