Let me begin by saying this: I was a New Yorker for many years, and I never saw the point of waiting in line for a burger for an hour at Shake Shack in Madison Square Park. This is why I now live in South Carolina.
Shake Shack has now filed for an IPO. They hope to achieve a $1 billion stock market valuation. Let me give you the basics:
Revenue: $84 million
Net Income: $3.5 million
Back-of-the-envelope, that's a P/E of a little under 300. But you want to pay for growth, right? I'm only being a little sarcastic. Shake Shack is opening restaurants left and right. They now have over 60. At the current rate of growth, they will soon have several hundred.
And this is what progress is all about, right? McDonald's (MCD) is a mess. Who knows? Maybe Shake Shack will become the next McDonald's. Once again, I'm only being slightly sarcastic. Look at Chipotle (CMG). The stock has been almost a ten-bagger in seven years. If you have a formula for success, and people love the product, then it deserves to trade at a high multiple.
But let's be realistic. A valuation of $1 billion for $3.5 million in profit? And people are super excited about this. I mean, it's profitable! That doesn't happen very often.
What a world we live in.
If something grows, people want to give it capital, so it grows. But those are pretty terrible margins. If Shake Shack can't achieve better margins selling overpriced burgers than McDonald's selling underpriced burgers, I'm not sure what the point is. But it's a restaurant IPO, in the year 2014. El Pollo Loco (LOCO) has done great.
I should be happy about one thing -- that a small company like Shake Shack is accessing the public markets at all. And they are doing so for the right reasons, to raise money, not to get liquid at the top. Sarbanes-Oxley be damned. I remember back before Sarbanes-Oxley, tiny restaurant companies used to go public all the time. Peet's Coffee and Tea went public in 2000 with an $80 million market cap. Bring those days back, I say.
As you can probably tell, I won't be buying SHAK on the IPO; more or less on principle. I'm not going to buy it for more or less the same reason I wouldn't wait in line for the burgers. I don't do what everyone else is doing.
I'm more of a value guy, I guess, a bit of a contrarian, and therefore, sometimes I miss out on some really great trades. I also miss out on some really big blow-ups.
My guess is that the initial enthusiasm will carry Shake Shack for a while. But what happens to most stocks that are pricing in triple-digit growth is that they disappoint, eventually, they can't execute, or they sacrifice their principles along the way. There are exceptions, of course, like Chipotle, but also Facebook (FB).
Maybe I just need to eat the burger, and I will get it. I doubt it. I think it is a fad.