Shake Shack vs. Chipotle: Which Is the Better Buy?

In a year where the S&P 500 has returned 16%, it's striking to see shares of both Shake Shack (NYSE: SHAK) and Chipotle (NYSE: CMG) suffer so badly. Both stocks are down more than 30% year to date, and while the entire fast-casual dining sector has been under pressure this year, that doesn't fully explain their sell-offs. After all, the AdvisorShares Restaurant ETF, a pure-play fund designed to track the broader sector, is down only 3% year to date.

Despite their similar stock trajectories for the year, these fast-casual dining companies are fighting different battles. Here's why I'd much rather own shares of Shake Shack -- though neither is a buy today.

Chipotle is losing at its own game

Since Chipotle's initial public offering (IPO) nearly 20 years ago, shares have returned just over 4,000%. Coincidentally, it just opened its 4,000th restaurant last week, an sevenfold increase from the 581 restaurants it had up and running in 2006, the year of its IPO. That year, it reported $820 million in revenue and $41.4 million in net income, with same-store sales growing 19.7% in the first quarter. For all of 2006, same-store sales grew 11.9%, to $1.61 billion. The company even managed to grow same-store sales by 2.2% during the financial crisis of 2009, and 15 years later, during the pandemic, it grew same-store sales by 15.2% for 2021.

But last quarter, Chipotle grew same-store sales by just 0.3%, far lower than during the height of the Great Recession. The prior quarter, same-store sales declined by 4%, and Q1 saw a decrease of 0.4%. These same-store sales numbers range from meager to grim, and they're in contrast to the 7.4% same-store sales growth that Chipotle achieved for all of 2024.That was essentially unchanged from the 7.9% same-store sales growth of 2023.

So, Chipotle only recently lost its mojo, but it's undeniable something's wrong. Restaurant-level margins are falling in tandem with same-store sales, and as CEO Scott Boatwright mentioned in his earnings call, low- and middle-income diners are visiting Chipotle less often, even after the company addressed a 2024 controversy over portion sizes by directing 10% of stores to retrain in portion sizing.

Image source: Getty Images.

In that earnings call, the word turnaround was never mentioned. Yet management cut its forecast for comparable sales to a low-to-mid-single-digit decline and also noted declining restaurant-level margins. And in a tone-deaf move, management touted buying back $687 million shares at an average price of $42.39 per share. Yet shares fell by nearly 30% after that Oct. 28 earnings call; management would have done better to wait, or, better yet, to invest that $687 million into improving the company's operations instead.

Shake Shack shares have only one problem -- but it's a dealbreaker

Shake Shack doesn't have any of Chipotle's current woes. It's growing same-store sales at a healthy clip, most recently by 4.9% year over year last quarter, and sales are up 16% year over year. And while Chipotle plans to open around 350 new locations in 2026, growing its store count by around 8%, Shake Shack is launching the most ambitious expansion plan in its history, with the goal of tripling its stores. Last quarter alone, it opened 20 new locations, bringing its store count to over 630 worldwide.

The biggest reason I see to be bullish on Shake Shack is this: It's increased same-store sales for 19 quarters in a row, despite raising prices several times during that streak. That's pricing power, or the ability to raise prices without hurting sales, and it indicates a loyal customer base. Combine that with the potential for rapid expansion and margins that keep improving, and it's easy to envision earnings per share multiplying in the years ahead.

Even so, I wouldn't move on Shake Shack just yet. Its price-to-earnings (P/E) ratio of 84 is too lofty, and it seems that a best-case scenario for the company is already priced in. For context, the companies making up the S&P 500 have an average P/E ratio of just under 30 today.

Even a great business can be overvalued, and buying overvalued stocks tilts the odds against you as an investor. While Shake Shack is a more promising buy than Chipotle, I would wait for its valuation to come down to a more reasonable level before buying.

William Dahl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short December 2025 $45 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.