- Shake Shack stock has underperformed since its IPO.
- Shake Shack faces fierce competition in the burgers and fries market.
- Shake Shack is an unproven company.
Restaurant chain Shake Shack (NYSE:SHAK) went public on February 4, 2015 with much fanfare. The stock shot up 125% before cascading downward. Since its IPO, Shake Shack’s stock performed horribly with a decline of 10%. Index investors performed better, with the S&P 500 up 0.3% during this time (see chart below), as of this writing. This highlights the dangers of speculating in a stock right after it goes public. Shake Shack’s stock is actually priced below its IPO price. Let’s examine the business behind this stock.
Another Burger Joint?
Shake Shack operates in the business of selling burgers, hotdogs, shakes and fries. It's an intriguing company, having started out as a hot dog stand in New York City. However, when pondering long-term investment, investors need to ask what makes this company special other than its newness? The restaurant seems ordinary and the healthy lifestyles movement may serve to work against Shake Shack over the long-term due to its emphasis on burgers, hot dogs and shakes. Also, Shake Shack’s focus on its core competency is suspect. The company also offers dog food, which seems out of place and potentially off-putting to some customers.
Shake Shack operates in a fiercely competitive industry with many players. In FY 2015, Shake Shack’s revenue came in at $191 million. In contrast, McDonald’s FY 2015 revenue came in at $25.4 billion. Moreover, McDonald’s holds $7.7 billion in cash, which exceeds Shake Shack’s market cap of $1.34 billion by a factor of six times. McDonald’s could easily undercut Shake Shack if it wanted to.
Increasing traffic represents a sign of strength for restaurants and retailers. Shake Shack had no problems increasing traffic in FY 2015. However, Shake Shack’s same stores sales expansion largely came from menu price increases in FY 2014, according to its filings. Fast casual chains that claim to sell healthy food may put a dent in Shake Shack’s market share.
Fundamentals A Mixed Bag
Shake Shack’s fundamentals are spotty. This is probably due to its start-up nature. Its revenue expanded 235% over the past three years (see charts below). However, net income declined steadily since 2013 and the company turned a net loss due to IPO-related costs in FY 2015. I would like to see Shake Shack get costs under control. The company was free cash flow positive in FY 2015. However, investors should expect heavy capital spending on expansion to suppress free cash flow or even render it negative.
Shake Shack holds plenty of cash on its balance sheet thanks to its IPO. The company showed $70.8 million on its most recent balance sheet, representing 45% of its stockholder’s equity. This should help the company self-finance expansion. The company sports no long-term debt.
Shake Shack does have potential. However, it may want to shy away from dog food and focus on its core competency of serving burgers, hot dogs and shakes. Moreover, conservative investors may want to wait and see if Shake Shack could consistently expand free cash flows. The company’s competition could drown it out. Growth-oriented investors may want to take advantage of its lower price. However, be prepared to weather volatility and fundamental cloudiness before any potential payoff.