There are few businesses that have compounded capital like Domino's Pizza (DPZ 0.30%) has. Since its initial public offering in July 2004, shares have generated a monster 6,560% total return. That would've turned a $1,000 investment into more than $66,000 today.
But as of this writing, this top restaurant stock trades 25% off its peak, which was established in December 2021. Should investors buy, sell, or hold Domino's in 2025?
The bull case
There are so many wonderful qualities investors need to know about Domino's that make up a compelling bull case. Investors won't struggle to find reasons to buy shares.
For starters, Domino has durable competitive advantages. Its brand is well-known not only in the U.S., but internationally as well. It has 21,002 locations around the globe, with about 20% share of the quick-service pizza market. Steadily higher same-store sales (SSS) over time, and a concept that works in 90 countries, are indicative of the brand's strength and value proposition.
The company's scale also helps it benefit from cost advantages when buying key inputs, mainly pizza ingredients. Scale also allows Domino's to spend more on marketing and technology initiatives that are spread over a large store base. Smaller chains aren't as fortunate.
Achieving more growth shouldn't be an issue. The goal is to open about 800 net new stores in the U.S. and more than 4,400 internationally by 2028. Given strong unit economics, with each location providing a three-year payback on the initial investment, there is surely lots of interest from franchisees in opening stores. Management says there are more than 170 new potential franchisees in the pipeline.
The fact that the business is consistently profitable might be taken for granted. In the past decade, Domino's has reported an average operating margin of 17.8%. This leads to cash generation, which the leadership team undoubtedly uses to focus on growth initiatives.
But capital returns are also a priority. Domino's quarterly dividend payout has soared 387% in the past decade. In the past five years, the outstanding share count has been reduced by 16%, thanks to meaningful stock buybacks.
Reasons to sell
Shares of Domino's have risen 46% in the past five years. At the same time, the S&P 500 is up 81%. Clearly, the market has been worried about something.
This could be due to softer demand trends, as SSS growth took a hit in fiscal 2021 and fiscal 2022. Domino's does operate in the hyper-competitive restaurant industry. People have a large number of choices, and they have zero switching costs. What's more, there are virtually no barriers to entry for anyone to open up a pizza shop.
That gives hungry customers the ability to be more discerning how they spend their money, particularly when inflationary pressures are still on everyone's mind. Fast-food chains are offering value deals, and grocery stores have no shortage of frozen pizza options that could substitute for ordering from Domino's.
Valuation concern
Make no mistake about it -- I believe Domino's is a great business. Its brand recognition, solid long-term track record of opening new locations, SSS growth, consistent profitability, and capital returns are hard to ignore. Shareholders have reaped the rewards with monster gains.
On the other hand, intense competition will never go away. That's the key reason someone might want to sell the stock.
I think the bull case holds more weight, which means Domino's should -- at the minimum -- be on your watch list. However, I view holding the stock as the best decision right now.
That's because the valuation doesn't look that attractive. At a price-to-earnings ratio of 25.4, the stock is fairly valued, especially when you realize earnings per share is expected to grow at just a 7.8% average yearly rate between fiscal 2024 and fiscal 2026.
