Chipotle (CMG) shares were trading for "just" about $300 in late November, but in a short while, the stock has almost gone parabolic and it is pushing $400. I have heard many analysts talking about Apple (AAPL) being too expensive now, but Chipotle makes Apple stock look like a bargain! While Chipotle seems like it might be reaching a major top at $400, Apple shares look capable of rising much higher based on a much lower price to earnings ratio, and a cash horde of about $98 billion.
Few companies have been able to make more money for their shareholders than Apple, Inc. and Chipotle Mexican Grill, and both companies have stocks that trade in the triple digits. The comparisons pretty much stop there, however, and this becomes clear once you take a closer look at each company. Apple has developed very complex electronic devices that feature unique designs and capabilities. This has allowed it to crush a number of competitors and dominate the smart phone and tablet market. On the other hand, Chipotle makes a healthy burrito, as well as other food offerings, and this has allowed the company to grow.
No doubt, both companies are amazing success stories, however, what I find most amazing is that investors are currently willing to pay about 4 times more in terms of price to earnings multiples for Chipotle compared to what they are paying for Apple. Yes, that's right....the pure genius and mastery of making burritos and other fare, is much more highly valued (by a factor of about 4) than the pure genius that Apple products offer. If Apple shares were to trade with the type of price to earnings ratio that Chipotle has, the stock would be trading for over $2,000 per share.
Something seems very backwards about these valuations. By comparing the complexity of the operations and product offerings made by each company, along with the valuation metrics, it becomes very clear that Apple shares should be trading higher. It also seems clear that Chipotle investors might be giving the company a little too much credit for mastering the art of spooning rice and beans into a flour tortilla. I use Apple products and find them to be incredibly intuitive and useful.
For the purposes of doing some research for this article, I went to a Chipotle restaurant for lunch and ordered a burrito. While I appreciated the open kitchen format and the quality of the ingredients, I was not satisfied with the end result. The flour tortilla was warmed up, the rice and other ingredients were spooned in along with grated cheese, but by the time my burrito made it down the assembly line to the cash register, the food had already cooled off. By the time I unwrapped it from the foil, I was left with a lukewarm to cold burrito, and even the cheese was entirely unmelted. I was told that "corporate" will not allow employees to melt the cheese because of the time involved - big mistake.
It was certainly not the best burrito I ever had, and it left me wondering why investors are paying so much money for what is a relatively easy-to-replicate business model (especially one that still has room for improvement). On the other hand, Apple has created some of the best electronic products I have ever owned. It's interesting to see many analysts and investors talk about the potential overvaluation of Apple shares, and all the while a company like Chipotle trades with a much higher P/E ratio. Investing in a momentum growth stock like Chipotle can be immensely rewarding, and since it seems to be impervious to anything as it endlessly bounds higher, it is hard to sell.
It's also easy for Chipotle shareholders to discredit naysayers, because they have been wrong in the past. It's also easy to get greedy with a stock like Chipotle and keep expecting it to give more. However, when this ride ends, and I strongly believe it will, painful lessons of paying too much for a stock will come forth. Momentum growth investors who ignored valuation were harshly punished in stocks like Netflix (NFLX), as it fell from over $300 per share to below $100, as it hit bottom.
So after comparing these two great growth stocks, I conclude there really is no comparison. I would bet on a continued rise for Apple, and sell Chipotle while investors are still willing to pay sky-high valuations for the stock.
Chipotle Mexican Grill operates a chain of restaurants that offer burritos and other Mexican fare. It has been a market leader for the past few years, but the price to earnings ratio is now about 45, and investors need to consider if this valuation is sustainable or even logical. Momentum stocks with high P/E ratios work really well, until they don't and investors won't want to be involved if Chipotle misses earnings or announces disappointing news.
Here are some key points for CMG:
- Current share price: $398.12
- The 52 week range is $240.09 to $400
- Earnings estimates for 2012: $8.70 per share
- Earnings estimates for 2013: $10.84 per share
- Annual dividend: none
- Price/Earnings ratio: about 45 times earnings
Apple, Inc. is considered by some to be overvalued after a strong run, but the stock is still just trading at about 12 times earnings. The average stock in the S&P 500 Index also trades at about 12, and if anything, a company like Apple deserves to trade at a premium to the average market multiple. After all, it has a cash horde of about $98 billion on the balance sheet and it continues to produce some of the best tech products. Apple is about to launch the iPad 3 and later this year the Apple TV is expected to be released.
Here are some key points for AAPL:
- Current share price: $545.17
- The 52 week range is $310.50 to $548.21
- Earnings estimates for 2011: $42.73 per share
- Earnings estimates for 2012: $47.49 per share
- Annual dividend: none
- Price/Earnings ratio: about 12 times earnings
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.