Shake Shack IPO and Valuation Insights
You know, dear reader, that we tend to geek out on this valuation stuff. I’ll also fess up to having a slight problem when it comes to impulse control and Shake Shack. So it only stands to reason that while reading the Shake Shake IPO offering docs a couple of valuation issues popped up, right?
First and foremost, let’s note that a former Manhattan hot dog cart IPO’d at $1.63bn. That’s a pretty amazing story. (I still warmly remember those early Manhattan days, lining up at that silly long line in Madison Park waiting for a shack burger. Ah, the good ol’ days… )
But let’s put this in perspective: just how many Shackburgers is this worth? Google was helpful enough to give us current menu pricing at a local DC ‘Shack:
For the 12 months ending September, 2014, the ‘Shack reports revenues of $78 million. Converting that to Single Shack Burgers, that would be the equivalent of 16.25 million singles. But who doesn’t get fries? And a custard? Throwing in a Fair Shake and Fries brings your Shack Meal to $13.15. So basically the Shack needs to sell 5.93 million shack meals to turn $78 million in revenues.
Phew. That’s a huge line.
But what about this valuation? It’s pretty steep by any measure.
We dug into the offering docs a little further. Based on the IPO the Shack initially traded at 17.9x annual revenues, and an astounding 99.6x Adjusted EBITDA.
Just for fun, let’s convert that to Shack Meals:
That’s right – the Shack needs to sell 17.9 years worth of Shack Meals (our metric) in order to return this valuation. Phew.
Understanding the Valuation
This is actually a great learning point. If McDonald’s – which is obviously a much older, much larger, much more established company- trades at 3.3x Sales…. how can Shake Shack be so expensive?
There are a few things that drive outsize valuations… and an IPO tends to magnify these issues to giant proportions. Consider:
- Growth: McDonalds is not in the steep part of the growth curve. Shack Shack increased their number of stores by 25% last year. So in part this valuation is considering future growth, not past performance.
- Sector Trends: The company is a rare restaurant IPO. The “Burger Market” happens to be the largest sector in the US restaurant industry. Burgers are also “hot” these days. So we have an IPO of a fast growth company launching into the jaws of the largest industry segment.
I still have a feeling that this one is overvalued- which tends to happen with IPO hype. But it’s important to look beyond the LTM metrics and understand where this (or any) company is going.