Why Is Everyone Talking About Domino's Pizza Stock?

Domino's Pizza (NYSE: DPZ) has long been a household name among consumers. However, it hasn't always been a fan favorite among investors. That latter group tends to be always looking for the next big trend in hot areas such as artificial intelligence or robotics. A pizza chain -- even one that has had some remarkable share price run-ups -- can find it hard to attract investors' attention.

This has changed, however, since Berkshire Hathaway revealed that in the third quarter it bought a stake in Domino's Pizza stock worth more than half a billion dollars.

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A global food brand

Over the years, Berkshire Hathaway has taken positions in well-known food and beverage companies like Coca-Cola and McDonald's, and outright purchased purveyors like Dairy Queen, Orange Julius, and See's Candies. In that light, Domino's appears to be right in the conglomerate's wheelhouse.

While most people will think of Domino's Pizza as a restaurant operator, the reality is more nuanced. Like McDonald's, it operates predominantly under a franchise business model; 99% of its stores are owned by franchisees. So, unlike Chipotle Mexican Grill or Starbucks, the pizza chain makes money mainly by collecting royalties from its store owners, not by selling food directly to the public.

While Domino's Pizza also generates revenue from selling those stores the ingredients and other supplies they need and from franchise advertising, these are lower-margin businesses that largely support the franchisees. Still, Domino's long-term success is linked closely to the franchisee's performance. So long as franchisees grow their sales, Domino's will benefit via royalty income.

Domino's Pizza's value proposition to consumers is simple: It aims to offer delicious food at affordable prices at convenient locations or delivered directly to customers' doors. Most of its restaurants aim to provide the pizzas to customers within 30 minutes. Consumers seem to like what it's offering; Domino's delivered one out of every three pizzas in the U.S. in 2022.

It is also important to note that while Domino's Pizza started in the U.S., today it has almost twice as many stores in international markets as it does domestically. As of the end of fiscal Q3 2024, 14,072 of its 21,002 total stores were internationally based. These markets also accounted for roughly half of its $18.9 billion in global retail sales over its past four reported quarters.

The global pizza business is massive and growing

Domino's Pizza is already a major player in the global pizza market, but the company is not likely to slow down anytime soon. The global quick-serve pizza market is estimated to be worth $94 billion (and growing), especially as markets overseas evolve in the coming years, thanks to factors like GDP growth and modernization. With $18.3 billion in global retail sales, Domino's has both a significant market share and ample room for growth in a niche that is still fairly fragmented.

The most obvious way it can feed its growth will be to keep opening new stores, both in the U.S. and in emerging markets. Management has set a target of having 7,700 stores in the U.S. by 2028, up from 6,800 in 2023. Over the longer term, it aims to reach 8,500 stores in the U.S. Similarly, it plans to add more than 4,500 stores in international markets by 2028, bringing its overseas store count to 18,500.

Beyond that, Domino's can grow sales at its existing stores via strategies like product innovation, service improvements (such as improving on-time delivery rates), and investing in technology to improve store operations and the customer experience. The development of new technologies in areas such as AI and robotics could further elevate customers' experiences in the future.

In other words, this pizza company is just getting started.

What Berkshire's move means for investors

When Berkshire Hathaway buys a stock, investors should pay attention. After all, Warren Buffett and his stock-picking lieutenants have been shrewd at identifying good businesses to invest in for the long term.

Still, investors should not rush into buying this stock. Instead, we should put it on our watch lists, learn about the business, and hopefully gain conviction in it. Only then should we consider investing our hard-earned cash in it.

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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Chipotle Mexican Grill, Domino's Pizza, and Starbucks. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.