The S&P 500 (^GSPC -1.11%) has been on an absolute tear since early last year, fueled by developments in artificial intelligence (AI), a rebounding economy, an uncontested election, and recent interest rate cuts by the Federal Reserve. After gaining 24% in 2023, the broad-based index is up roughly 28% so far in 2024 (as of this writing). History suggests the market run will likely continue into 2025.
The ongoing rally started on Oct. 12, 2022, and while every bull market is different, history can be instructional. On average, bull markets tend to last more than five years. Since we've just entered year three of the current rally, there's a distinct possibility the S&P 500 will continue to gain ground in 2025.
There's more. Going back 50 years, the S&P 500 has generated gains 73% of the time. In years following back-to-back gains of more than 20%, the S&P has risen 12%, on average, which suggests the rally is poised to continue.
Stock splits have experienced a revival in recent years. This has prompted investors to take a fresh look at companies that initiate stock splits, as this move is usually the result of years of consistent revenue and earnings growth. One such company is Chipotle (CMG -1.12%). Since its IPO in early 2006, the stock has returned 7,360%, leading to a massive 50-for-1 stock split earlier this year -- the first in the company's history.
Despite gains of that magnitude, there's every reason to believe that Chipotle's growth story will continue in 2025. Read on to find out why.
Image source: Getty Images.
Leading the category it pioneered
Before Chipotle opened its first restaurant in 1993, the concept of fast-casual didn't exist. By focusing on higher-quality food delivered quickly, the company changed all that. Customers responded to Chipotle's fresh ingredients and "food with integrity" mantra, and the rest, as they say, is history.
Consistent growth has been one of the hallmarks of the company's path to success, and there's every reason to believe that will continue. Chipotle is on track to deliver double-digit revenue and profit growth this year and open roughly 300 new locations, with 80% featuring a Chipotlane.
The aforementioned Chipotlane approach has kicked the company's growth up a notch. By installing dedicated pickup lanes for mobile orders, Chipotle has supercharged its digital strategy by appealing to its highest-volume customers while reducing congestion at its checkout counters. This strategy has proven wildly successful, increasing sales and profit margins.
Chipotle has been leaning into mobile ordering, which has emerged as an important growth driver for the company. The company surpassed 40 million rewards members earlier this year, which tend to be among Chipotle's most dependable customers. As a result, the growth of digital orders continues to outpace in-restaurant sales, amounting to 34% of food and beverage revenue in the third quarter.
The company has been working to expand internationally, with several dozen locations scattered across the globe. Furthermore, while Chipotle had over 3,600 restaurants at the end of the third quarter, management is targeting 7,000 locations in North America. Add to this its largely untapped international opportunity, and the potential for future growth becomes clear.
You need only review Chipotle's financial results for evidence that its various strategies are bearing fruit. In the third quarter, Chipotle generated revenue of $2.8 billion, up 13% year over year, resulting in diluted earnings per share (EPS) of $0.28, up 22%. It's always a good sign when profits are growing faster than revenue, as this illustrates it the company has achieved the scale necessary to leverage its existing assets, ultimately increasing profitability.
Data by YCharts
A word on valuation
The evidence suggests that Chipotle has a long runway for growth ahead, but some investors might be put off by the company's lofty valuation. After all, the stock is currently selling for 61 times earnings, compared to a multiple of 31 for the S&P 500. However, taking a step back can provide some important perspective.
Over the past decade, Chipotle's average price-to-earnings (P/E) ratio is roughly 83 -- as illustrated in the chart, well above its current level of 61, which suggests the stock is historically cheap. It's also worth noting that during the same period, Chipotle has gained 404%, more than double the 200% gains of the S&P 500, which illustrates why it's deserving of a premium.
Taken together, this shows why Chipotle is a buy heading into 2025.
