Market Overview

Why Shake Shack Can't Sustain This Valuation

Why Shake Shack Can't Sustain This Valuation

Paul La Monica is a weekly guest on #PreMarket Prep, a daily trading idea radio show hosted by Joel Elconin and Dennis Dick.

  • As of Monday's close, Shake Shack Inc (NYSE: SHAK) gained more than 13 percent since its January IPO, but the stock has declined 46 percent since its May high.
  • CNNMoney Digital Correspondent Paul La Monica said that he is "mystified" by Shake Shack's valuation, though he said they make a "tasty burger."
  • However, according to La Monica, talk of Shake Shack as the next Chipotle Mexican Grill, Inc. (NYSE: CMG) is overstated.

Even after a nearly 50 percent decline from its highs, Shake Shack is overvalued relative to growth, said CNNMoney's Paul La Monica. Shake Shack would need "so much more expansion to grow into this market valuation," he argued.

Instead, La Monica theorized that Shake Shack is a "classic case" of a company where people are enamored with the "story" instead of focusing on the fundamentals. It's easy to compare Shake Shack with Chipotle because they are both high-growth fast casual dining. There is one main difference, La Monica said: Chipotle was the first in its space, whereas Shake Shack needs to compete with Five Guys and other high-end, gourmet burgers.

Shake Shack declined 5.5 percent on Monday, falling by $3.15 to $51.99. The stock is still trading nearly 35 percent above its 52-week low, at $38.63.


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