Shake Shack is wasting little time getting its initial public offering to market.
We got the initial S-1 filing on Dec. 29, and now we’ve got a pricing on the Shake Shack IPO — the company will issue 5 million shares at a range of $14 to $16, listing as the ticker “SHAK.”
Assuming the deal is struck at the midpoint of that range, the market cap will be about $533 million. But it’s a good bet that Shake Shack’s valuation could more than double on its debut, which is expected to hit the market next week.
So … why is Wall Street so excited about the Shake Shack IPO? And should its bigger burger rivals be scared?
Shake Shack, which is the product of of famed restaurant mastermind Danny Meyer, has proven to be more than just a flash in the pan. The company has the feel of a roadside burger stand, with classic menu items like premium burgers, hot dogs, crinkle-cut fries, shakes and frozen custard. But Shake Shack twists tradition with items like as beer and wine.
If anything, the Shake Shack brand is about quality. The food uses fresh and all-natural ingredients that are hormone- and antibiotic-free. It certainly helps that Meyer has created some of the world’s high-end restaurants like Union Square Cafe, Gramercy Tavern and Blue Smoke.
So for a company like McDonald’s (MCD), Wendy’s (WEN) Burger King or Carl’s Jr., the Shake Shack is actually tough to compete against. These operators have brands that are about low costs and less-than-premium food, using factory-style foodmaking processes involving frozen items and cheap ingredients.
Meanwhile, for a few bucks extra at Shake Shack, a customer can get a much better meal and dining experience. No doubt, the “fast casual” approach has been a boon for companies like Panera Bread Co (PNRA) and Chipotle Mexican Grill, Inc. (CMG), which have been big winners on Wall Street.
Shake Shack IPO Hopes to Take a Bite Out of Huge Market
OK, then how big is the market opportunity for the Shack? Actually, it’s enormous. Consider that the burger market is the largest dine-out segment in the U.S. with $72 billion in sales. So far, Shake Shack is a miniscule piece of the burger market, with a mere 63 locations. But the company believes there is room for 450 in the U.S.
Shake Shack has been successful in places outside the U.S., with locations in Moscow, Dubai, Istanbul and London. According to the Shake Shack IPO prospectus filing: “In Shake Shack’s 10-year history, we have become a globally recognized brand with outsized consumer awareness relative to our current footprint.”
Because of the huge market opportunity, the Shake Shack has had little trouble pumping out solid growth. During the 39 weeks ended September 24th, revenues surged 40% to $83.8 million.
So yes, all this will gin up lots of excitement for Shake Shack IPO. However, this could mean that the valuation will quickly get out of whack and that there could eventually be a pullback.
We’ve seen this kind of boom and bust with several recent hot restaurant deals. For example, the 63% gain in El Pollo Loco (LOCO) has evaporated since the offering in July. The same thing happened to Potbelly (PBPB).
So for investors looking at SHAK stock, it’s probably a good idea to be patient and wait for a chance to grab the stock at a better valuation.
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.