When Shake Shack went public in January, its shares were priced at $21. The next morning, the stock began trading at $47 per share, and in May, the price peaked at nearly $97. The better-burger brand’s stock has everyone from financial analysts to other limited-service executives abuzz with the possibilities of the restaurant industry’s stock potential.
A look at the initial public offering (IPO) and market conditions, though, reveals that Shake Shack’s stock results might be more anomaly than a sign of the future.
Nick Rossolillo, president of Concinnity Financial in Spokane, Washington, and an investment adviser who also contributes to The Motley Fool, says it’s difficult to say why Shake Shack’s share price was driven up so much. It may have been keen interest in the brand or the limited-service industry itself that drew a frenzy of investors.
“I tend to think it’s just an interest in the fast-casual dining sector in general, especially with the success of companies like Panera Bread and Chipotle,” Rossolillo says. Given the success of those brands in recent years, investors may have looked at Shake Shack’s position in the fast-casual burger sector and pegged it as the success story of tomorrow.
Eli Rosenberg, cofounder and vice president of marketing at data provider Food Genius, points to the steady rise of the better-burger movement. He says the most innovative, chef-driven concepts continue to influence the market. Shake Shack’s menu, which boasts hormone- and antibiotic-free beef, as well as vegetarian-friendly offerings, may have contributed to the brand’s popularity and its potential for returns.
The team behind Shake Shack may have also played a role in the skyrocketing stock. Howard Penney, managing director at investment research firm Hedgeye Risk Management, cites the involvement of the brand’s high-quality group of restaurateurs—Union Square Hospitality, founded by renowned operator Danny Meyer. He adds that concepts that do well in New York City can generate a lot of media publicity and put the IPO in front of people who might not otherwise take notice. Add a relatively small number of available shares into that mix and the brand had a recipe for success.
“When you have a very popular restaurateur with a big concept in New York City, with big returns, and then little supply of stock, that can lead to extreme valuations,” Penney says. “It won’t stay at this level for a lot longer.”
No matter the skill of the team involved, Shake Shack is ultimately selling hamburgers, which, Penney says, is a commodity product, meaning it is the same product as other brands, just from different producers. Penney adds an overvaluation may exist for a year, but after that, “you’ll see reality setting in.” He believes a more appropriate price is around $20 per share (Shake Shack’s stock price was in the mid-$40s at press time).
A shift in the market is what Rossolillo sees as a likely trigger for a drop in the brand’s stock level. He believes the overall market is overpriced—not just Shake Shack or the limited-service sector. For this reason, he adds, a number of companies have elected to go public in recent years.
Companies that are considering an IPO typically try to strike when the market is peaking, Rossolillo says. In that respect, Shake Shack might have timed its offering well, despite its modest plan for growth (only about 10 domestic stores each year).
The decision to go public can be motivated by many things. For Shake Shack, the market environment for restaurant stocks may have been too tempting to ignore. The past few years have been an attractive time for restaurant IPOs. Penney cites lower gas prices, decreasing unemployment, and high consumer confidence as compelling factors. Interest rates have also been close to zero.
“The list goes on and on as to why, if you’re a restaurateur and you’ve got a decent concept, you’re bringing it public today,” Penney says. “It would have been crazy for [Shake Shack] not to.”
Beyond Shake Shack, other emerging trends may keep burger brands in investors’ sights.
“Customization, focus on higher-quality ingredients, unique cheeses, and toppings like fried eggs are definitely still emerging as important factors for any operator looking for success for their burger platform,” Rosenberg says. He adds that the focus this year has been on quality and transparently sourced ingredients.
Even if Shake Shack’s share price was overvalued, Rossolillo says, it’s unlikely to hurt the business.
“Shake Shack, I think, did the right thing,” Rossolillo says. “They put together a good business and good growth prospects, and the valuation came as a result of that.”
For other brands hoping to use Shake Shack’s IPO formula, Penney stresses it was an unusual situation. There are plenty of examples of other companies in the food space that have generated similar hype, only to experience lackluster results, he says. It may be impossible to re-create Shake Shack’s public offering, and the high share prices are unlikely to last forever.
“This is not something that you can learn from. This just happens,” Penney says. “The volatility in the marketplace will take care of itself.”