Shake Shack (SHAK) has tumbled 55% from its post-IPO peak, and yet it’s still so pricey that any reasonable investor would gag on the prospect of putting new money to work in SHAK stock.
If you’re looking to explain SHAK’s tumble from its high, look no further than valuation. Since it went public at $21 per share at the end of January, investors have been paying a ridiculous premium for SHAK’s profit potential.
Indeed, eye-watering valuations have already caught up with most investors. True, SHAK stock is still twice the IPO price, but almost everyone who bought it after its trading debut is sitting on a paper loss.
Oftentimes, that kind of steep selloff makes a stock look like a bargain. In the case of SHAK, however, it’s like getting a free t-shirt when you buy a Bugatti.
SHAK has a forward price-to-earnings multiple of 139. Let that sink in. This isn’t Amazon (AMZN), a company on its way to global dominance.
It’s a burger chain.
Incredibly, SHAK stock is actually more expensive than AMZN on a forward-earnings basis. Even if SHAK achieves its projected annual compound growth rate of 30%, that is still an insane multiple.
SHAK’s Expansion is Purposely Sloooow
As much as revenue and profits are growing year over year today, Shake Shack’s intentionally slow expansion plans make the valuation look even more absurd. At SHAK’s current rate of expansion of 15 U.S. stores per year, it would take 34 more years to reach its 450-store goal, The Motley Fool notes.
The market clearly loves the Shake Shack story. Fast-casual restaurant chains are fashionable these days, as well as SHAK’s use of all-natural foods.
You can see where this is going. SHAK has become a darling for thematic investors betting on the great demographic force known as the Millennials.
Consider the impact Baby Boomers have had on thematic investing. Even now, part of the bull case on healthcare stocks is that Boomers are getting old. Well, the Millennial generation is even bigger than the Boomer cohort.
The problem with story stocks like SHAK is that it’s all too easy for the share price to become divorced from the fundamentals, but the fundamentals always catch up. Furthermore, valuation has a way of reverting to the mean. SHAK might be a trade at current prices, but it sure isn’t an investment.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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