Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Crazy Stocks

The Burrito Bubble is Chipotle the most Overvalued Stock in America?

America faces a burrito bubble, shares of Chipotle Mexican Grill (NYSE: CMG) were trading at $1,348.47 on 20 October 2020.

Moreover, Chipotle’s share value grew by $489.57 in 2020. Mr. Market paid $858.19 for Chipotle (CMG) on 2 January 2020 and $1,339.68 on 16 October 2020 and $1,348.47 on 20 October 2020. Moreover, Chipotle shares rose to $1,379.03 on 2 September 2020.

In contrast, Chipotle reported a quarterly operating loss of -$4.94 million and a quarterly common income of $8.18 million on 30 June 2020. Moreover, Chipotle’s revenues and gross profit have fallen in 2020.

Chipotle’s Revenues fall

It is obvious Mr. Market has not read Chipotle’s financial numbers. Chipotle’s revenues, gross profit, and revenue growth rate are falling as its stock price soars.

Chipotle (CMG) started 2020 with quarterly revenues of $1.44 billion on 31 December 2019. The quarterly revenues fell to $248.87 million on 31 March 2020 and $166.76 million on 30 June 2020.

Moreover, Stockrow estimates Chipotle’s revenue growth rate fell by 4.85% in the quarter ending on 30 June 2020. However, Chipotle’s revenue growth rose by 7.84% in the quarter ending on 31 March 2020 and 17.56% in the last quarter of 2019.

Chipotle’s cash falls

Mr. Market is paying $481.49 for a company with less money and less cash. Chipotle’s quarterly operating cash fell from $186.59 million on 31 December 2019 to $182.07 million on 31 March 2020 and $122.86 million on 30 June 2020.

Moreover, Chipotle’s quarterly ending cash flow fell from $528.27 million on 31 March 2020 to $105.33 million on 30 June 2020. However, Chipotle Mexican Grill (CMG) began 2020 with a $93.22 million operating cash flow on 31 December 2019.

On the positive side, Chipotle is not borrowing much money. Chipotle reported a quarterly financing cash flow of -$2.10 million on 30 June 2020.

Mr. Market Overvalues Chipotle

I think Chipotle (CMG) has a low level of cash for a company Mr. Market values at $1,341.33 and $1,348.47 a share. Chipotle had $906.66 million in cash and short-term investments on 30 June 2020.

In addition, Chipotle had only $5.370 billion in total assets on 30 June 2020. I think that number is low for company Mr. Market values at $1,341.33 a share.

I conclude Chipotle stock is in a bubble because its market price is based purely on Mr. Market’s imagination rather than the financial numbers. Instead, I imagine investors are buying Chipotle because people are more ordering more takeout because of coronavirus.

Can Takeout Save Chipotle?

Chipotle’s delicious burritos and tasty tacos are popular takeout foods. However, I think office workers and employees compose a large percentage of Chipotle’s customers.

Unfortunately, many of those office workers are now working remotely from home. Hence, those workers will be far more likely to fry up some meat for tacos or cook a frozen burrito in the microwave than order Chipotle or drive there.

Chipotle will need to change its business model because many workers will not return to the office anytime soon. Microsoft (MSFT) will not consider reopening its offices until January 2021, The Verge reports.

Can Grubhub save Chipotle?

Many of those remote workers will still order Chipotle burritos. However, Chipotle (CMG) will make less money because it will have to share profits with delivery services such as Grubhub (NYSE: GRUB).

Grubhub charges a $1.99 delivery fee and $1.29 service fee on each order, The New York Times claims. The Times claims Grubhub charges a 25% markup on food orders.

Thus Grubhhub makes the extra money from Chipotle orders. Meanwhile, Chipotle still has the expense of operating a restaurant and paying its employees.

One problem, Chipotle faces is that the higher prices for delivery will discourage many regular diners from ordering. Those diners get out of the Chipotle habit while stuck at home and may never come back.

Can Chipotle Go Dark?

 I think the only Chipotle could survive is reduce the cost of delivery orders.

Chipotle will either have to launch its own delivery service or reduce its preparation costs. However, I think Chipotle (CMG) could have to make changes customers will hate such as using cheaper ingredients to stay profitable.

Another change Chipotle could make is to convert restaurants into dark kitchens. To elaborate a dark kitchen is a restaurant with no dining facilities. Instead, a dark kitchen cooks food only for delivery. Another name for dark kitchen is cloud kitchen.

A Chipotle dark kitchen will have no cash registers or service counter. Instead it will only have facilities where drivers pickup orders. Several companies have tested dark kitchens but the only major restaurant brand to test the concept is Chick-fil-A.

Can Kroger save Chipotle?

I think chains, such as Chipotle and Domino’s Pizza (DZP) are already close to dark kitchens.

However, I think the biggest player in the dark kitchen sphere will be supermarket operators such as Kroger (KR). Kroger already operates kitchens and extensive delivery markets in its stores.

One possible solution for Chipotle could be to join forces with Kroger or Instagram. For instance, customers could order Chipotle burritos with their grocery orders. That could allow Chipotle to charge lower prices for delivery orders and become more competitive.

Other potential solutions for Chipotle could be to team up with Walmart (WMT) or Dominos to create combined delivery services to eliminate middle men such as Instagram and Postmates.

Investors need to Avoid Chipotle

I think investors need to avoid Chipotle Mexican Grill (NYSE: CMG) because its stock is in a bubble. I predict the bubble will burst and the share value will collapse.

All investors need to avoid Chipotle because I think its share price is unsustainable. However, Chipotle’s burritos are still delicious and well worth ordering through Grubhub (GRUB).