With three separate earnings reports now under its belt as a publicly-traded company, the market can finally start to see past the euphoria fog of its IPO and really start to figure out where Shake Shack (SHAK) is, and where it’s going.
Yes, the company topped Q2’s earnings estimates for SHAK stock. In fact, it blew them out of the water on the heels of jaw-dropping growth. Before anyone jumps on the bandwagon, though, they need to look at both sides of the Shake Shack coin. Sooner or later, it’s all going to be baked into the stock’s price.
SHAK Stock Pros
Fast Growth: What else needs to be said about last quarter’s 75% growth in revenue, somewhat fueled by same-store sales growth of 12.9%, but largely stemming from a swath of new store openings? The company aims to continue opening stores at a similar rate for the rest of the year.
Rising Estimates: After having time to digest its second-quarter results, Shake Shack upped its full-year revenue guidance from a range of $161 million-$165 million to a range of $171 million-$174 million. While one upward revision isn’t necessarily a game-changer, it’s not unusual for strong startups to repeatedly raise expectations while reaching their targets.
So-So Analyst Ratings: It seems counterintuitive, but the fact that analysts are more pessimistic on the stock than they are optimistic is something of a positive, since it leaves these professional stock-pickers room to upgrade SHAK and raise price targets. Even veteran analysts are willing to chase a good story stock, so it’s likely we’ll see favorable analyst action following the second-quarter and future earnings results.
SHAK Stock Cons
A Ridiculous Valuation: While the growth is impressive and the restaurant chain has clearly not completed its growth plans, even at a typical profitability ratio of 10% of revenue, and factoring in plausible growth, SHAK is tough to justify at a price-to-sales ratio of 6.45. The market’s average P/S ratio is less than 2.0. Never mind the fact that decent profitability isn’t anywhere in sight.
Secondary Offering: As hot as the Shake Shack story may be, the current float may not be able to absorb the 4 million shares (or more) that are about to flood the market. The company announced a secondary offering — the proceeds of which will go entirely to current shareholders — after reporting its second-quarter numbers. For perspective, SHAK sees average daily volume of about 904,000 shares, and the current float is 5.88 million. Those 4 million shares of SHAK stocks ARE going to hurt.
It’s Still Small: The strength of the concept is undeniable (custom-made, antibiotic-free hamburgers), but with only 71 locations and only $60 million in the bank, a bigger player could easily introduce a similar product and simply out-muscle or outspend Shake Shack.
Verdict
While the stock clearly has some solid trading upsides, SHAK may be a name best avoided for the average investor.
All three of the above-mentioned upsides are compelling, but all three require some degree of timing from investors…. either the entry, or the exit, if not both. Though the story’s mania has died off considerably, it’s still a closely-followed and often-traded name, which makes it all the more difficult to time a trade.
At the other end of the spectrum, it’s more a matter of when, rather than a matter of if the three downsides haunt the stock. SHAK just isn’t worth the trouble, at least not until the lingering echoes of the ballyhooed IPO are completely gone.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
