We came across a short thesis on Shake Shack Inc (NYSE:SHAK) on ValueInvestorsClub by bluewater12. In this article we will summarize the bears’ thesis on SHAK. The company’s shares were trading at $101.42 when this thesis was published, vs. closing price of $133.38 on Jan 3rd.
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Shake Shack Inc (NYSE:SHAK) is a roadside burger stand serving a classic American menu of premium burgers, hot dogs, crispy chicken, frozen custard, crinkle-cut fries, shakes, beer, wine and more. The company’s value proposition is centered around the use of all-natural, hormone and antibiotic-free Angus beef, ground fresh daily, cooked to order and served on a non-genetically modified organism potato bun. Since its first opening in 2004, the company has built a solid worldwide presence with more than 518 restaurants, including more than 295 in the US.
The bear thesis is based on several arguments that put SHAK in a bad light vs. the whole industry. First, the author argues that the company’s low single-digit comp sales growth is not indicative of a healthy growth concept, especially considering that traffic declined in the 5 out of 7 quarters preceding the write-up. Second, he argues that average unit productivity at restaurants reached a stalemate, while new unit productivity has started to decline – it is believed that most of the productivity gains in the recent past were achieved through menu price increases, which is not a sustainable practice going forward. Another negative sign for the brand is the first restaurant closures in history being announced in August 2024 – while some bulls argue this is a positive sign for margins, it is likely that more closures will come up in the future, thus further pressuring revenue growth. Finally, the author sees the exit of an activist investor (Engaged Capital), which managed to boost shareholder value in 2023, as a sign that the stock price reached its maximum potential.
The author backs up his short thesis by presenting his personal negative experience with the brand, such as poor service and undercooked food, as well as showcasing several other similar complaints on social media. With that being said, the author concludes that SHAK’s 2025 EPS estimates as well as the inflated P/E of 100x are both overvalued. He does not give a precise stock price target but argues that the stock’s high valuation premium will vanish sooner or later, while chances of negative surprises on earnings side are high, both leading to a decline in stock price.
While we acknowledge the potential of SHAK as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SHAK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
