Why the Huge Pop in Muscle Maker Stock Is Just the Beginning

Relatively obscure Muscle Maker (NYSE:GRIL) stock soared more than 60% higher on heavy volume on Monday, Oct. 26 — a day when the rest of the market dropped big on stalled stimulus talks and spiking Covid-19 cases.

Top view of woman eating healthy food while sitting in a gym
Source: Shutterstock

It was an enormous rally in a small-cap restaurant stock that no one saw coming.

Well … almost no one.

In InvestorPlace’s financial newsletter The Daily 10X Stock Report which is aimed at delivering to your inbox, every single day, a stock pick that could rise by at least 10X — I alerted subscribers on Sept. 30 that GRIL stock was an explosive play on the emerging ghost kitchen megatrend.

Since then, GRIL stock has soared more than 90%.

In other words, no one saw this massive rally in GRIL stock coming except for The Daily 10X subscribers. Those subscribers were also told about Nio (NYSE:NIO), Plug Power (NASDAQ:PLUG), Kandi (NASDAQ:KNDI), JinkoSolar (NYSE:JKS) and Digital Turbine (NASDAQ:APPS) before those stocks staged huge breakout rallies, and have scored 200%-plus gains in all those names (to read more about the newsletter, click here).

But back to GRIL stock, I think this big October breakout could actually be just the beginning of a much bigger, longer uptrend wherein shares soar above $10.

Here’s how that could happen.

The Emerging Ghost Kitchen Megatrend

The Covid-19 pandemic has entirely disrupted the world. That’s the bad news. But the good news is that where there’s disruption, there’s opportunity — and in the restaurant sector, that opportunity is emerging in the form of something called “ghost kitchens.”

Ghost kitchens are commercial kitchens, without any seating capacity, designed specifically for delivery orders. The concept has been around for some time. But it wasn’t until the Covid-19 pandemic — when physical restaurants shutdown and delivery demand surged — that ghost kitchens took center stage.

Now that they have the spotlight, ghost kitchens will inevitably turn into the future of dining for the following reasons:

  • Better alignment with shifting demand (U.S. meal delivery sales have risen ~300% since 2018)
  • Dramatically lower recurring costs (lower labor costs, lower rent costs, lower decoration costs, etc.)
  • Significantly more flexibility (traditional restaurant locations operate on 5-plus year leases, whereas ghost kitchens are typically rented out monthly)
  • More rapid, cost-effective geographic expansion (traditional restaurants cost upward of $250,000 to open, and such openings take several months; ghost kitchens cost about $20,000 to open and open in less than 90 days)

Of course, dine-in restaurants will forever be a thing. Ghost kitchens won’t entirely replace the traditional dining experience. But much like e-commerce has leveraged superior economics and convenience to garner a larger and larger share of the shopping pie, ghost kitchens will leverage superior economics and convenience to garner an increasingly large share of the dining pie.

And, to that end, investing in ghost kitchen stocks today is like investing in e-commerce stocks back in 2010.

One of the best ghost kitchen stocks to buy today? GRIL stock.

Muscle Maker Is a Strong Ghost Kitchen Pure-Play

A tiny fast-food company that was on the brink of extinction last year, $23 million Muscle Maker Grill appears to be on the cusp of a huge ghost-kitchen-powered turnaround that could turn the stock into a multi-bagger during the 2020s.

Here’s the story.

Muscle Maker Grill is one of those health-conscious fast-food chains that is trying to win by selling affordable, healthy foods in an on-the-go format, with the company’s core offerings being protein-rich burgers, sandwiches, wraps and shakes.

That’s the right concept in this day and age. But management wasn’t executing well enough to compete in the competitive “fast healthy” category, and as a result, revenues — which had been booming earlier in the 2010s — fell nearly 40% from 2017 to 2019. Management was forced to close stores. Losses were piling up.

Muscle Maker Grill looked doomed in late 2019. Then … in early 2020 … management did two big things. One, they stopped cutting corners and started refreshing the brand via new menu adds, store remodels and a new Healthy Joe’s store concept. Two, they stopped closing stores and leaned aggressively into low-cost unit expansion with ghost kitchens.

Early results from this turnaround are promising. First quarter revenues rose 21% year-over-year.

Sure, Covid-19 struck in the second quarter, and the company did not sustain growth in Q2. But as Covid-19’s negative impact on dining trends fades, Muscle Maker’s big growth should return, mostly because management continues to expand geographic reach via ghost kitchens.

Specifically, in the past two months alone, Muscle Maker has opened two new ghost kitchens in New York City, one new ghost kitchen in Chicago, and its first ghost kitchen in Miami. The company now operates 10 ghost kitchens across four major cities, with both of those numbers growing every single month.

In other words, Muscle Maker is successfully turning Covid-19 disruption across the restaurant industry into an explosive ghost-kitchen-powered expansion opportunity.

So long as management continues to successfully against this opportunity, GRIL stock could keep soaring.

Huge Upside for Muscle Maker Stock

To be clear, I’m not saying that this turnaround will end with Muscle Maker turning into the ghost kitchen version of Shake Shack (NYSE:SHAK) or Chipotle (NYSE:CMG).

No way. MMG would need a lot more capital to pull that off.

But I am saying that with these new food concepts, a hyper-focus on ghost kitchens, and ample cash on the balance sheet, Muscle Maker Grill does have a unique opportunity to become a much more profitable restaurant chain with a much broader retail footprint.

After all, Muscle Maker Grill operates just 33 locations today, with 6 locations in New Jersey alone and only 3 locations in California and Florida combined.

Assuming Muscle Maker Grill leans into ghost kitchens to replicate its New Jersey store density across America, then 200+ locations are likely within the next few years. Average restaurant sales should remain strong thanks to the new food concepts. Profit margins should expand meaningfully on the back of lower operating costs for ghost kitchens.

When you connect all the dots, my modeling suggests that Muscle Maker could do about $5 million in net profits within the next few years.

That may not seem like much. But restaurant stocks typically trade around 25X forward earnings. A 25X multiple on $5 million implies a $125 million market cap for Muscle Maker Grill, which — on today’s share count — implies a future price tag for GRIL stock of over $10.

Bottom Line on GRIL Stock

Muscle Maker isn’t the next big thing. But because shares are so cheap today, even mild success with the company’s new ghost kitchen initiative could spark multi-bagger returns in GRIL stock.

Mild success on that initiative seems increasingly likely. Therefore, so do multi-bagger returns in the stock. And, for that reason alone, GRIL stock should be on your buy radar today.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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