Given that its business thrived rather than struggled during the worst of the COVID-19 pandemic, Domino’s Pizza (DPZ) stock delivered a solid performance during 2020.
Last March, when markets cratered as the coronavirus spread, Domino’s held up reasonably well. Sure, it saw a brief decline during the market-wide sell-off, but already coming off of a spike in February 2020, shares were pretty close to where they were at the start of the year.
And with lockdowns providing carry-out restaurant chains a windfall, strong results helped push the stock well above its pre-COVID price levels. Now, though, as vaccine optimism rises, “stay-at-home” restaurant plays are fading in popularity among investors.
DPZ stock may have bounced back a bit after its late February correction (partly due to a disappointing earnings release), but don’t expect the pullback to end here. Although shares aren’t necessarily going to fall completely back to their early 2020 prices, as growth slows and more compelling opportunities present themselves, there’s going to be less interest in this stock.
Domino’s Stock And Slowing Growth
Late last month, the pizza chain released quarterly results. With both revenue and earnings falling short of expectations, shares dipped on the news.
Wall Street analysts expected $1.39 billion in sales for the quarter. Instead, the top line came in at $1.36 billion. Sell-side consensus called for $3.89 per share in earnings, but the company posted adjusted earnings of only $3.46 per share.
While results were up from the prior-year quarter, they still missed investors’ expectations. As mentioned above, in the weeks since its pullback, we’ve seen DPZ stock partially recover.
Yet, with the outlook calling for slowing growth, shares may have room to fall. How much further? Given its slightly higher valuation relative to similar names, expect only a modest pullback from here.
Slight Pullback Possible, But Nothing Dramatic
As its growth slows, and investors focus more on restaurant recovery plays, it’s going to be hard for Domino’s Pizza stock to resume its prior upward trajectory.
It should be noted, though, that the situation here differs from other restaurant stocks that thrived during 2020. A good example is Chipotle (CMG), which has clearly gotten ahead of itself valuation-wise.
Yet, with significant growth projected for the coming year, Chipotle likely has enough to keep its stock price steady. However, with DPZ’s sales and earnings growth set to fall back into the single-digits, this stock might not be able to grow into its valuation.
Instead, expect valuation contraction. Fortunately, though, not to a severe degree. With a forward P/E ratio that is only slightly higher than similar names like McDonald’s (MCD), additional pullbacks may be minimal.
What Analysts Are Saying About DPZ Stock
According to TipRanks, DPZ is a Moderate Buy, based on 11 Buys and 7 Holds. At $414.24, the average analyst price target suggests 14% upside potential. (See Domino’s stock analysis on TipRanks)
Bottom Line
As investors become more interested in bidding up recovery plays, restaurant stocks that thrived during the pandemic (such as Domino’s) will likely fade in interest.
And unlike some other names, which have high levels of growth potential to keep their share prices stable, this company’s slowing growth doesn’t offer that opportunity.
So, where’s DPZ heading from here? Expect another pullback, though likely nothing dramatic. But more importantly, don’t expect shares to make another move higher anytime soon.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
