Shake Shack (SHAK, Financial) may have a cult following among investors, but the stock, no matter how you look at it, is overvalued. Ever since the meteoric rise of Chipotle Mexican Grill (CMG, Financial), investors are looking for high growth stocks in the fast-food industry. While Shake Shack is growing at a good pace, the company isn’t the next Chipotle. Shake Shack is highly overvalued even for a growth stock and will likely move lower in the near future.
On the flip side, Shake Shack has been reporting strong growth ever since it went public. In the latest reported quarter, Shake Shack’s sales jumped 67% to $53 million, beating the analysts' estimate by $5.8 million. The company’s EPS of 12 cents was also ahead of the analysts’ estimate of 7 cents.
While there’s no doubt the company’s business is successful, the stock is way too expensive to own. The company has a market cap of more than $1.5 billion, but the sales for FY2015 are only expected to come in at $118 million. For FY2016, analysts are expecting sales to grow to $190 million.
While it is obvious that Shake Shack’s growth is tremendous, it will be a long time before the company grows into its present valuation. Hence, I expect Shake Shack’s share to fall further. And it looks like the company’s insiders agree with me. Many insiders have sold Shake Shack’s shares over the past few months, affirming that the stock price is too high to be justified.
Shake Shack recently filed S1 allowing pre-IPO insiders to sell 26 million shares. Insiders were dumping Shake Shack’s shares even before the filing. In August Green Equity sold $71,590,536 worth of Shake Shack’s shares followed by Meyer Daniel Harris selling $56,511,032 worth of shares. Over the last week, ACG Shack LLC sold shares worth over $6.5 million in two transactions.
All in all, insiders have dumped about $130 million worth of shares over the last few months. This accounts for about 8% of the company’s current market cap. Clearly, the insiders also believe that the shares are overvalued and have decided to book profit by cashing in early.
Conclusion
Shake Shack has a very strong business model that is built to last. However, the company is massively overvalued, and the stock will likely trend downward in the coming months. Shake Shack will take years to grow into its present market cap. Despite the company having fewer than 100 restaurants, the stock is trading at a hefty premium and is too expensive even for a growing company.
A high number of insider sales continue to confirm that the stock is in fact overvalued and will plunge in the coming months. Investors should stay away from Shake Shack at present levels and look for a better entry point when the shares eventually drop.
