IPO Valuation for Shake Shack Too High for Its Own Good?

Stock Market AnalysisThe current initial public offering (IPO) market in some circumstances reminds me of the glory days back in 1999 and 2000; when newly minted technology stocks with little business surged to superlative heights driven by euphoric frenzy buying. While the valuation back then was far more out-of-whack than currently, there are situations now that leave me shaking my head and wondering what just happened, even after I do a thorough stock market analysis.

Take the case of gourmet hamburger operator Shake Shack Inc. (NYSE/SHAK), trading at $72.00. I have disliked this stock from a valuation perspective since it was trading in the $40.00 range. Here we are, up another 75%, and the stock market continues to bid it higher. The short sellers are clearly distressed and rushing to cover positions, trying to figure out what happened.

This is pretty good for the founder who first began operations selling hot dogs from a cart in New York City and is now worth hundreds of millions. You can thank the stock market for that.

My Stock Market Analysis on Shake Shack

The thing is, Shake Shack does have a wonderful product. But it’s not special and there are no barriers to entry, which tends to be a major benefit in top companies. Anyone can go out and produce the next great hamburger, which is why I don’t get the story here.

The $2.6-billion valuation assigned by the stock market on Shake Shack equates to an eye-popping, mouth-opening value of about $39.0 million for each of the company’s 66 outlets.

Again, I may be wrong but the valuation is ridiculous.

Shake Shack did report a nice 11.7% increase in same-store sales in the first quarter, which is in the neighborhood of those reported at Chipotle Mexican Grill, Inc. (NYSE/CMG). In my view it’s the only similarity…and I think Chipotle is the better bet.

Shake Shack stock trades at a sky-high 802X its 2016 earnings per share (EPS) with a price/earnings-to-growth (PEG) ratio of 42. This is simply not realistic. Even if the company adds 100 stores, the valuation would still be crazy.

Shake Shack’s Future

I’m saying Shake Shack is a short; this is because there’s so much upside momentum in the stock, making this highly risky. Yet I do believe the stock will come back to earth at some point when the momentum traders realize what they are paying is outrageous.

shake shack inc

The situation with Shake Shack is not unique. There will be others coming down the pipeline that will trade at crazy valuations. These include the $50.0-billion valuation given to car service provider Uber, and the $46.0-billion price tag on China smartphone maker Xiaomi Inc.

At these prices, Uber and Xiaomi would be worth more than 80% of S&P 500 companies. Now you know why I’m reminiscing back to 2000.