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?

Shackanomics

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:

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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.

Shack Valuation

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.

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Just for fun, let’s convert that to Shack Meals:

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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.

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