Wingstop stock price forms a risky pattern as the rally gains steam
Wingstop (NASDAQ: WING) stock price is firing on all cylinders as investors compare it to Chipotle Mexican Grill. It has soared to a high of $417, up from the year-to-date low of $240 and by over 385% in the past five years. This surge has brought its total market cap to over $11.7 billion.
Strong growth but valuation concerns remain
Chipotle Mexican Grill has become one of the best restaurant stocks in the US. In the past few years, it has moved from a small restaurant chain into a company valued at almost $80 billion. This growth happened as its annual revenue soared from over $5.6 billion in 2018 to over $9.8 billion last year.
Chipotle’s performance has triggered a high demand for other restaurant companies. As I have written before, CAVA Group has done well as investors predict that it will do for Mediterannean dishes what Chipotle did for Mexican.
Wingstop is also doing well as the company’s revenue growth accelerates. Its annual revenue has soared from almost $200 million in 2019 to over $460 million last year. It has done well in a profitable way as the net income has surged from $20.5 million to $70.2 million.
The most recent financial results showed that the system-wide sales increased by 36.8% to $1.1 billion. Its revenue rose by 34% to $145 million. This growth happened as the company opened new stores in the US and other countries.
Wingstop hopes to open between 275 and 295 new stores this year and that its business will generate low double digit same store sales. Most importantly, the company has started paying dividends to their shareholders.
The biggest challenge for WING stock price is that it has become severely overvalued. It trades at a forward price-to-earnings ratio of 117, higher than the industry median of 16.80. It also has a forward EV to EBITDA multiple of 21 vs the industry’s 1.20.
These are pricey valuation metrics for any company, even one that has a forward revenue guidance of 24%. For example, Nvidia has a forward revenue growth of 80 and a forward PE ratio of 54.
Therefore, from a fundamental perspective, I suspect that the stock will pull back as some investors take profits. We have seen some companies like Celsius Holdings and Super Micro Computer retreat.
Wingstop stock price forecast
The daily chart shows that the WING share price has been in a strong bullish trend in the past few years. It has remained above the 50-day and 200-day Exponential Moving Averages (EMA), which is a positive thing.
However, the stock has formed a rising wedge chart pattern, a popular bearish sign. Therefore, with it nearing the confluence level, there is a likelihood that the stock will have a bearish breakout in the coming weeks. If this happens, it will likely drop to $350.
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