The guac is extra, is that OK?

You might be willing to fork up the extra two bucks but — sound the alarm — extra charges could be coming for all Chipotle products. Last week, Chipotle released its disappointing fourth quarter earnings report, which fell short on estimates on store growth and revenue. But the most alarming part came from the company’s earnings call, when management said they would heavily consider raising prices to offset rising wholesale food costs.

Chipotle’s stock hit an all time high on Tuesday at $726.63. The lackluster earnings numbers were announced after the markets closed, and on Wednesday morning, the stock crashed over 7 percent to as low as $670.

But Chipotle enthusiasts should have no reason to worry. If the company wants to create fair value to its shareholders — full disclosure: I am one of them — it’s in Chipotle’s best interest to not raise product prices.

Here’s why: Chipotle is incredibly overhyped. Revenue in the last quarter increased by an impressive 26.7 percent to over a billion dollars. The company opened up 60 new restaurants and increased same store sales by over 16 percent. Those are incredible numbers on their own.

But investors demand more. Estimates on company earnings were far higher than the numbers reported. And that’s a problem. If Chipotle continues to hold itself to the ridiculously high expectations of investors, the company will eventually peak out on growth and fall short. There is also a long list of economic conditions that can harm Chipotle’s business that the company doesn’t have control over.

Take, for example, rising wholesale food costs. The company observed increases in dairy and beef prices, which shortens profit margins on every burrito and burrito bowl it sells.

Investors want Chipotle to mitigate these risks by increasing the prices of its products. Their argument is that they’ve done it before — last year, rising beef costs forced Chipotle to increase the price of its beef burritos. Some customers griped, but they still coughed up the extra cheddar for the burritos they love so much.

But if Chipotle knows what’s good for its long-term growth, it should be willing to prioritize the customer over the shareholder.

By raising prices, Chipotle is enabling its shareholders to expect the same ridiculous revenue numbers that they want to see from a growth stock. And there’s only so many quarters that Chipotle can try to please its investors before it can no longer sustain 25 percent revenue increases and double digit same-store sale increases.

When that time comes, investors will ditch the company and send the stock sinking even more.

Chipotle should be willing to take the hit now and allow revenues to shrink with the existing menu prices. As it stands, many of the menu’s products with guacamole will break $10, which means it could be more attractive to dine out at other restaurants. As a price point comparison for Syracuse students, a burrito bowl with guacamole and carnitas will run you only a few cents under the cost of pad thai to go from Appethaizing. That’s no longer a fast food price point.

Sure, investors will be upset and likely sink the stock a couple more percentage points. But the industry consensus is that Chipotle is an overvalued stock, which means it can afford to sink down to fair market value.

In this case, passing on the extra guac means saving some extra guap.

Brian Cheung is a senior broadcast and digital journalism and finance dual major. His column appears weekly. He can be reached at bkcheung@syr.edu and followed on Twitter @bcheungz.

Published on February 8, 2015 at 11:15 am