Shake Shack's Burgers Are Tastier Than Its Stock

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Financial Markets Wall Street Shake Shack IPO
Richard Drew/APShake Shack executives ring the New York Stock Exchange opening bell on Friday, the day of the chain's IPO.
Last week's debut of Shake Shack (SHAK) was a scorcher. The popular burger flipper and frozen custard mixer hit the market on Friday at $21, and it wasn't enough. The stock more than doubled on its first day of trading.

Friday's 119 percent surge came on top of the market's voracious appetite for the 63-unit burger chain. Underwriters were initially hoping to price the offering between $14 and $16 until market demand caused the firms taking Shake Shack public to raise that range to between $17 and $19.

Shake Shack has the growth characteristics of a hot eatery IPO. It's expanding at a heady pace. We've seen Shake Shack grow quickly since its humble beginnings as a hot dog cart that opened in the heart of New York City's Madison Square Park in 2001. There were just seven locations at the end of 2010, tripling to 21 at the end of 2012 before tripling again to 63 today.

Sales have naturally gone through the roof. System-wide sales -- now including 31 company-owned locations, five licensed domestic units and 27 licensed international locations -- have gone from $21 million in 2010 to $140 million in 2013. Shake Shack has been profitable in recent years, though margins and profits have contracted through 2014.

Shake Shack also happens to be riding the trend of fast-casual establishments that have successfully bridged the gap between traditional fast-food joints and conventional casual-dining eateries. Some are calling it the next Chipotle Mexican Grill (CMG), but that would be premature at best and inaccurate at worst.

A Chip Off the Old Chipotle

Chipotle went public nine Januarys ago, and it, too, was a Wall Street debutante that hit the market priced in the low $20s before doubling on its first day of trading. Both stocks were initially priced with market caps north of $700 million. Chipotle closed its first day of trading at more than $1.4 billion. Shake Shack wrapped up its first day on the market with a market cap of nearly $1.7 billion.

Chipotle's been a 30-bagger since hitting the market in 2016, and some Shake Shack investors are hoping for a similar trajectory. The problem, of course, is that the starting lines weren't exactly the same. Chipotle went public a year after ringing up a profit of $37.7 million on $627.7 million in revenue. Shake Shack is much earlier in its life cycle. Its trailing results clock in with a profit of $4.5 million on $106.7 million in revenues. It just doesn't make sense for Shake Shack to command a greater valuation than Chipotle.

There's also the matter of the brand. Chipotle is the market darling in burrito joints. There are others, but its streak of positive and recently accelerating comparable-restaurant sales places it in a league of its own. Shake Shack is certainly a quality brand, but there are plenty of gourmet burger places out there that are also growing quickly.

Consumer Reports last summer surveyed tens of thousands of fast-food fans to gauge the perceived quality of the leading national and regional brands. Shake Shack didn't make the list of 21 burger chains. Yes, the field is that crowded, and that will make it that much harder for any single chain to stand out, much less one that's pretty dearly priced today.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's one great stock to buy for 2015 and beyond.
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