Shake Shack Inc (NYSE:SHAK), the rapidly growing burger chain, was widely expected to have a hot IPO.
But I doubt few people were imagining SHAK stock would have this much sizzle.
The Shake Shack IPO already set up well, pricing a deal at $21 despite a range of $17 to $19. But it really blew the doors off this morning, when SHAK raced up more than 130% on its debut.
Why all the excitement? Well, let’s look into the background.
Shake Shack, The Growth Machine
Shake Shack is the mastermind of famed restauranteur Danny Meyer. He started his career back in the mid-1980s when he launched the high-end Union Square Café. Meyer then went on to create other popular restaurants like Gramercy Tavern, Eleven Madison Park, Blue Smoke and Maialino.
Then in 2001, he saw an opportunity to leverage his skills into developing Shake Shack, refining the concept from a modest hot dog cart to a modern-day roadside burger operation.
However, Meyer thought it was critical to have the same level of hospitality and quality as one of his high-end restaurants. For example, Shake Shack burgers have sustainable ingredients as well as hormone-free and antibiotic-free beef. The menu also includes inventive shakes, and even beer and wine.
This focus on premium offerings also means SHAK can charge premium prices; a burger is generally twice what you would pay for a McDonald’s (NYSE:MCD) Big Mac.
Breakneck growth certainly contributed to the popularity of the Shake Shack IPO; during the 39 weeks ended Sept. 24, SHAK’s revenues surged 40% year-over-year to $83.8 million.
But perhaps more eye-popping is how much growth opportunity there is in the space. The U.S. burger market is the largest dine-out category, with about $72 billion in annual sales — roughly double the size of the pizza market.
Shake Shack currently has 63 locations, only about half of which are in the U.S. Yet SHAK believes there’s room for 450 locations — a tempting prospect for any growth investor.
But considering Shake Shack has resonated in several parts of the world — from Dubai to London to Moscow — the opportunity is about more than just the U.S. market.
Should You Buy the Shake Shack IPO?
Close your eyes. Imagine you’re not talking about Shake Shack. Imagine any company. And no matter what company you come up with, it’s probably not going to be a good idea to buy into an IPO right after it runs up 130%.
But even in the restaurant space alone, you have several examples of companies where patient investors were able to buy in at much better valuations — Potbelly Corp (NASDAQ:PBPB), Habit Restaurants Inc (NASDAQ:HABT),
Noodles & Co (NASDAQ:NDLS) and El Pollo LoCo Holdings Inc (NASDAQ:LOCO).
The valuation on SHAK stock is at a nosebleed 16 times sales, which resembles a cloud operator more than it does a burger joint.
But to put things in perspective, rival HABT is currently trading at 1.8 times sales, while LOCO is at 3X. Larger fast-casual companies are much cheaper, too — Chipotle Mexican Grill, Inc. (NYSE:CMG) is at 5.7X and Panera Bread Co (NASDAQ:PNRA) sports a multiple of 1.8X.
In other words, SHAK stock is way too rich for any individual investor to consider right now.
For at least a month or so, buy the burgers, not the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
