Shake Shack: Another Predictably Overvalued Consumer IPO

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Shares of burger chain Shake Shack (SHAK) are soaring more than 130% today to $48 on their first day of trading, after pricing at $21 per share. With 36 million outstanding shares, the company (which owns 21 restaurants and franchises another 19) is worth a whopping $1.75 billion. That equates to $83 million per owned restaurant. With the average unit volume for an owned location being $5 million, of which $1.25 million is profit, you should be able to see the wacky pricing for the shares pretty clearly. This is not surprising, though, given how much fanfare consumer brand IPOs have been generating in recent years.

Even if you consider that the company plans to open 10 units a year in the U.S. and let international franchisees open even more overseas, it is impossible to justify a $1.75 billion valuation for a company with a total of 40 units open globally. As a result, I suggest you visit the company’s locations┬árather than invest in the stock at current prices. As we have seen with other consumer IPOs such as The Container Store (TCS), Potbelly Sandwich Works (PBPB), and Noodles and Company (NDLS), it is not uncommon for these IPOs to come back down to earth over time, so definitely monitor the situation if you are tempted to invest in SHAK today, but try to hold off for now.

Full Disclosure: No position in SHAK at the time of writing, but positions may change at any time