Chipotle’s 50-for-1 stock split is coming. Here’s what investors need to know

It seems that high-profile stock splits are all the rage. Just a few days later Nvidia divide your shares 10 for 1, Broadcom announced that it would follow suit. Moreover, several big names are choosing to separate this summer. After Nvidia’s stock split, perhaps the most anticipated is the fast-casual dining pioneer Chipotle (CMG -0.52%).

Nvidia shares are up about 10% since the split was completed on June 7. Can Chipotle investors expect a similar rise in the stock price? Let’s first consider some basics.

Here’s how the Chipotle split will work and what it could mean

A stock split, or more specifically a forward stock split, in this case, occurs when a company issues new shares to shareholders, thereby increasing the number of shares on the market. The shares then start trading at a lower price. This is done proportionally so that the total value of an investor’s portfolio does not change.

So in the case of Chipotle’s 50-for-1 split, each shareholder will receive an additional 49 shares for every share they own after the market closes on June 25. They now own 50 times more shares than they did before. However, they are not suddenly 50 times richer; on the contrary, when the markets open the next day, stocks are 50 times cheaper than the day before.

So the movement itself doesn’t directly affect the value of a portfolio, but it can affect it down the line. The drop in price removes a barrier for many retail investors to purchase shares, allowing more volume and money into the market. This certainly has the potential to positively influence the stock price, but not necessarily. Don’t count this as a guarantee that just because Nvidia’s shares rose post-split, Chipotle’s shares will rise as well.

Plus, it’s short-term thinking; don’t get lost trying to time the market. Instead, focus on the long-term value of the business.

So is Chipotle a good long-term play?

Chipotle smokes its peers in terms of growth

There are many options in the quick service restaurant (QSR) market. Chipotle must compete with players like McDonalds And Yum!, owner of chains like KFC and Taco Bell. Over the past few years, Chipotle has grown its revenue at a very impressive rate. Look at the difference in this table.

CMG Earnings Data (TTM) by YCharts

And the strong growth has been consistent even during difficult times for the market as a whole. In 2020, the year restaurants were hit hardest by the COVID-19 pandemic, Chipotle still managed to increase revenue by more than 7%. McDonald’s reduced its revenue by more than 10% in the same year. Showing that it is resilient and agile in times of crisis is not something to be taken lightly; this is a testament to the company’s strong leadership.

This growth appears to be continuing. The company expects to increase its earnings per share (EPS) by approximately 53% for 2024 compared to 2023. This represents approximately four times the growth expected by McDonald’s.

There are some reasons to be careful

Chipotle certainly has a lot to offer, and its growth cannot be denied. However, some aspects of the business don’t look so rosy. The incredible revenue growth is largely due to site expansion. If you look at same-store sales, the company saw a 7% increase in the first quarter of 2024, about half the revenue growth for the same period.

Its stock is also valued significantly more than McDonald’s and Yum! in relation to its current income. Investors are counting on its growth to continue to justify the valuation. If that growth is disrupted or begins to slow, that premium might suddenly no longer seem as justified.

Even with that in mind, I still think Chipotle is a good bet in the long run. However, keep an eye on this same-store growth. This is the figure that the company should be able to achieve when it does not open as many stores.