Shake Shack (SHAK) has been one of the hottest IPOs of 2015; on its very first day of trading, Shake Shack stock soared 130%, climbing from its offering price of $21 per share to more than $45.
Quite the fanfare for a burger joint with just 63 locations.
Shares have continued their wild ride since then, rocketing as high as $96 per share in May. However, today, SHAK stock sits in the mid-$50s.
In short, the stock market seems to be having a pretty hard time figuring out exactly what shares are worth.
Well, the answer is simple: They’re worth too much.
Last week, Shake Shack stock tumbled — despite blowout second-quarter earnings — as the company announced a secondary offering of SHAK stock at $60 per share. Why did that spook the market, you ask? Perhaps because the stock was trading as high as $75 in the wake of its monster second quarter, sending the message that shares were a tad overvalued.
GoPro (GPRO) stock saw the same reaction from Wall Street last year, when it lowballed its secondary offering at $75 per share — a steep discount to the $85 per share it changed hands for the day before. A month after the announcement, shares had plunged another 30%, trading just above the $50 range.
SHAK stock runs the risk of taking a similar dive — if only because its $2 billion valuation implies that each Shake Shack location is worth somewhere in the neighborhood of $30 million. Comparing that to its peers, only Chipotle (CMG) can come close to those lofty per-store values, with each location of the burrito chain worth around $13 million by Wall Street standards.
Another worry is that the proceeds from the Shake Shack secondary offering, unlike the GPRO secondary offering, will all go to SHAK stock insiders looking to cash out, meaning the company won’t be able to use any of those proceeds to … you know … actually grow.
All in all, there are just too many concerns surrounding the stock right now. I wouldn’t take a bite out of SHAK stock until it falls much, much lower.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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