Investors don't seem to know what to make of Domino's Pizza's (DPZ 1.28%) business these days. The stock was essentially flat in the three years that ended in mid-January, despite a few sharp rallies -- and subsequent slumps. Holding through that period would have provided shareholders a 2% return compared to the 38% rally in the S&P 500 index.
But are investors in for much better gains from here? Let's look at the fast-food chain's potential over the next few years.
Not your average fast-food stock
Billionaire Warren Buffett made headlines late last year by adding Domino's stock to Berkshire Hathaway's portfolio. It's easy to see what might have attracted the famed value investor to this business.
Domino's has a great brand. It is the biggest pizza company in the world, with 21,000 stores spread across the U.S. and 89 international markets. While domestic sales declined 2% in 2022 following pandemic spikes, growth has returned. Comparable-store sales were up 2% in the U.S. in 2023 and rose by 3% in the third quarter of 2024. That rebound occurred despite inflation and more caution on the part of consumers. "Our...strategy is resonating despite a pressured global marketplace," said CEO Russell Weiner.
The fact that consumers have become more cost-conscious in recent years hasn't harmed Domino's profitability. The company generates over 18% profit margin, or slightly above Chipotle's (CMG 2.97%) strong result.
CMG Operating Margin (TTM) data by YCharts
The bullish thesis for the stock over the next few years relies on Domino's continuing to win fast-food market share in both the U.S. and internationally while protecting that excellent profit margin.
Reasons to delay your order
Despite those encouraging metrics, Domino's stock has a better chance of underperforming the market in the coming years. It isn't cheap, for one, sitting at a price-to-earnings multiple of 27 compared to McDonald's (MCD 1.09%) P/E of 25. The fast-food titan is much more profitable at that lower price but is growing slowly right now. Growth-focused investors might also prefer Dutch Bros (BROS 1.16%), which has much more room to expand its store footprint over the next several years.
Chipotle is another tempting peer stock that investors might consider over Domino's. The Tex-Mex chain is expanding sales at twice Domino's rate, and its profit margin has been rising thanks to the combination of strong growth in prices and customer traffic. You'll pay up for those stellar financial results, though, at a P/E multiple of 52 times earnings.
It's true that Domino's has a clear path toward modest sales growth paired with strong profits and cash flow through 2027. These results are likely thanks to competitive advantages such as a highly efficient selling model that caters to take-away and delivery channels, and focuses on selling just a few menu items. Constant tech innovation has also helped allow the chain to thrive over the last several decades through a wide range of economic environments.
Still, investors don't have much faith that Domino's can sustainably accelerate comparable-store sales growth toward the high single digits, as is the case with Chipotle, or boost overall revenue higher by 25% or more, like Dutch Bros is doing today. Those factors make it a pricey investment in the competitive fast-food space. As a result, shares seem set to underperform rivals and the S&P 500 over the next several years. Buffett's Berkshire Hathaway might be willing to ride out another multiyear period of lackluster shareholder returns, but most investors should look for growth stocks elsewhere.
