Image source: Shake Shack.
Is Shake Shack(NYSE: SHAK) stock a sound investment? The answer depends on whether you want to invest in the high-growth restaurant chain for the long term. Given its aggressive valuation, it should take Shake Shack some time to grow into its current stock price.
Here's a quick snapshot into a few relevant trading metrics for Shake Shack stock.
Data source: Yahoo! Finance.
Of course, this data doesn't tell us much about Shake Shack's investment merit. So let's dive deeper into the business and see if its valuation can fill in some of the blanks.
Shake Shack post-IPO
Even though its shares have fallen more than 20% since its 2015 IPO, recent developments suggest that Shake Shack is well on its way to building a valuable, profitable business. The number of Shake Shack locations has more than doubled over the company's past two fiscal years, and it plans to use the roughly $112 million it raised in its IPO to fund continued store-count growth. New domestic company-operated locations are its key growth driver, and to that end, Shake Shack plans to open 13 more domestic stores in its current fiscal year, in addition to several licensed international locations.
Shake Shack also estimates that it will grow its same-store sales, another critical restaurant-industry metric, between 2.5% and 3%. The average analyst estimate puts Shake Shack's current-year sales growth at 35%, followed by a 29.7% increase in revenue in calendar-year 2017.
The success of restaurant franchisees and operators such as McDonald's, Burger King, and Starbucks suggests that Shake Shack should indeed also become a solidly profitable enterprise as it matures. However, Shake Shack may find itself up against a rising number of fast-casual burger competitors, including well-established names such as Five Guys and Smashburger. Restaurant investors are busy looking for the next Chipotle Mexican Grill, as its resounding success in the fast-casual space has spawned competition looking to cash in on the fortunes up for grabs. That competitive environment could limit Shake Shack's competitive runway to a degree.
Image source: Shake Shack.
Love the company and hate the stock?
Despite the tailwinds propelling its momentum, Shake Shack is overvalued. The stock trades at about 87 times its last 12 months' earnings per share, while the S&P 500 trades at around a P/E of 24 -- which is itself about 60% above the index's average historic value. Things don't look much better for next year, as Shake Shack is trading at roughly 63 times its expected 2017 earnings.
Sure, growth stocks with the brand strength and big-ticket potential of Shake Shack should trade at a premium to the average stock or market index. So it makes sense that the average rating among the 12 sell-side analysts covering Shake Shack is a "hold," suggesting that there's nothing wrong with the company other than its pricey shares. If Shake Shack does turn out to become the next Chipotle or McDonald's, its stock will become a smash success for its investors, even despite its currently elevated pricing. But the high valuation combined with the crowded market it operates in makes it hard to say that this stock is a sound investment.
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Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.