One stock that has arguably been overdue for a stock split is Chipotle Mexican Grill (CMG 0.30%). Trading at roughly $3,089 per share, its price tag is among the highest you'll find in the S&P 500.
While it can be difficult to predict if and when a company will split its shares, it's a move that can make sense when a share price reaches this level. At a lower price point, investors don't need to buy fractional shares, and thus, it becomes accessible to a wider pool of investors.
Chipotle's upcoming stock split is on a 50-for-1 basis, which will bring the stock price down to around $61. The stock will trade on a post-split basis on June 26, and it will be the first time the company has split its shares in its 30-year history. Should you invest in Chipotle before the stock split?
Does Chipotle's stock split really matter?
Stock splits can generate some excitement and bullishness around the business. While Chipotle's stock was already rising when it announced its stock split in March, the news certainly didn't hurt. Its shares have continued to rally and are up more than 35% in 2024.
But a stock split doesn't essentially change anything for investors. If you own 10 shares of the business today, you'll own 500 after its split. The difference will just be that the price is also divided by 50. Instead of 10 shares at $3,089, you'll have 500 shares at $61.78 -- assuming that the price doesn't change at around the time the split takes place.
In terms of your overall position in the company, nothing will change. Other than the share price being lower and it being easier for investors to own full shares of the business, there aren't any reasons to suggest that the restaurant stock will become a much better buy after the split.
The bigger question for investors is the valuation
Another thing that won't change is the valuation. While the share price will change, the stock will remain just as expensive with respect to earnings. And that's the biggest problem right now -- investors are paying a steep multiple for shares of Chipotle.
The stock trades at an incredibly high 67 times its trailing earnings. That's close to 3x the average S&P 500 stock, for which investors are paying 23 times earnings. And to make matters worse, the company's growth rate has been slowing down.
CMG Revenue (Quarterly YoY Growth) data by YCharts
Its comparable store sales rose at a rate of 7% for the first three months of the year. And for the full year, Chipotle anticipates comparable sales growth to be in the mid to high single digits, which is right around where it is now.
It's a decent growth rate for Chipotle, but whether it justifies a near-70 times earnings multiple is the big question investors will need to ask themselves.
Should you buy Chipotle stock today?
Chipotle has made for an excellent investment over the years and the business is still growing. But unless you are planning to buy and hold the stock for several years, its current valuation may make it too expensive to own right now. The high earnings multiple means investors are already pricing in a lot of future growth into the business.
For Chipotle stock to keep rising, it will need to continue delivering strong results, with no hiccups along the way. Investors may be better off pursuing other growth stocks instead.
