Why Does Warren Buffett See Opportunity in This Highly Valued Pizza Giant?

Core Viewpoint - Warren Buffett's recent investment activity includes significant stock sales and a new $550 million stake in Domino's Pizza, which raises questions about the valuation and potential of the pizza chain [1][2]. Company Summary - Domino's Pizza has a current P/E ratio of 28, which is higher than Buffett's typical investment threshold, but the purchase may have been made at a lower valuation of just under 25 times earnings during the summer [4][5]. - The company's asset-light business model, with 98.6% of its restaurants being franchises, allows it to maintain a high valuation due to lower overhead costs and consistent revenue from franchise fees [6][7][8]. - The stock experienced a 20% decline after its second-quarter earnings release, attributed to a lowered outlook for international store openings, but management maintains a 7% revenue and 8% operating profit growth guidance for the year [10][12][13]. Industry Summary - Domino's sees significant growth potential internationally, with a target of 40,000 restaurants compared to the current 14,000, particularly in markets like India and China [14]. - In the U.S., Domino's aims to grow same-store sales by 3% and plans to open 175 new domestic stores annually, which could enhance its market share in a slow-growing quick-service restaurant (QSR) sector [16][17]. - The current retail environment may favor Domino's, as its low-cost value proposition and efficient delivery model could help it capture market share from weaker competitors [18].