Please ensure Javascript is enabled for purposes of website accessibility

Could Shake Shack Be a Millionaire Maker Stock?

By Jon Quast – Apr 10, 2020 at 1:31PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One thing's for sure: It won't make millionaires overnight.

I believe the stock market is one of the greatest millionaire-maker tools ever. While the term "millionaire maker" is subject to one's initial cost, I take the term to mean a stock that can increase 10 times in value over the life of the investment. These 10-baggers are out there, but hard to find.

Could Shake Shack (SHAK 3.11%) make future millionaires out of today's investors?

A tower of Shake Shack hamburgers.

A tower of ShackBurgers. Image source: Shake Shack.

Can it generate 10-bagger revenue?

Let's establish what a 10-bagger for Shake Shack looks like. Right now, the company has a market capitalization of $1.5 billion -- small-cap territory. If it became a 10-bagger, it would be worth around $15 billion. That's not impossible for a fast-casual restaurant stock. For comparison, the restaurant gold standard is Chipotle Mexican Grill (CMG 2.62%) with around a $20 billion market cap. 

But to justify that kind of market cap, Shake Shack's revenue would have to grow considerably. Full-year 2019 revenue came in at $595 million. The company generates revenue in two ways: company-owned locations and licensing revenue from other locations. Company-owned locations are by far the greater revenue machine. At the end of 2019, 41% of Shake Shack locations were licensed, but accounted for a mere $20 million in revenue. Therefore, to meaningfully grow revenue, it needs to open many more company-owned locations.

This is partly how Chipotle grew into a $20 billion market cap. It quickly grew its restaurant base to 2,622 locations, all of which are company-owned. That's notably more locations than Shake Shack is targeting. When it went public in 2015, it was aiming for 450 domestic company-owned locations. It currently has 163, so its long-term goal is still a long way off. 

Granted, comparing Shake Shack to Chipotle with unit count is misleading, because Shake Shack has far superior average unit volume (AUV), the sales volume per restaurant location. For 2019, Chipotle's AUV was $2.2 million compared with AUV of $4.1 million at Shake Shack. In theory, Shake Shack could be a big business with relatively few locations.

But to reach a $15 billion market cap, Shake Shack would likely need to generate between $5 billion and $7.5 billion in annual revenue -- a price-to-sales ratio in a range of 2 to 3. I don't believe even 450 company-owned locations could do that. Keep in mind this chain started in New York City, where it's AUV is very high. It doesn't break out New York City numbers anymore, but when it went public, these New York locations had $7.4 million AUV.

As Shake Shack has expanded outside its home market, AUV has consistently fallen. For 2020, management was projecting AUV to fall to a range of $3.7 million to $3.8 million. And it projects long-term AUV of just $3 million. So at maturity, total revenue could far exceed $1 billion, but still fall short of the revenue necessary to make this a 10-bagger. 

What about profit?

One card Shake Shack has up its sleeve is a healthy profit margin. Starting with restaurant-level profit, its margin was 22.3% in 2019, beating Chipotle's 20.5% margin. This measure only looks at restaurant operations, excluding corporate expenses and capital expenditures like building new restaurant locations.

However, when you look at the bottom line, Chipotle is superior. Its net profit margin was 6.3% in 2019, while Shake Shack's was just 4.1%. That's because, as a larger chain, Chipotle has gained leverage. If Shake Shack can be disciplined with nonrestaurant expenses, this can be a much more profitable business as it reaches maturity, since it's already very profitable at the restaurant level. 

Returning to 10-bagger thoughts, whether Shake Shack will ever mint new millionaires will depend on what it does with that future cash flow. It could invest in more growth via developing a new restaurant concept or buying out another chain. That's very speculative; it's never expressed interest in doing so. It could also make shareholder-friendly moves like paying a dividend or buying back shares. Any of these moves could propel the stock higher.

But is it a millionaire maker?

To be clear, I'm describing a very optimistic multidecade scenario. Shake Shack is a top hospitality brand worthy of some optimism, and it could outperform the market long term. But reaching millionaire-maker status will be hard.

That said, one's entry point into the stock matters. And I believe there's a good chance Shake Shack stock could head lower in coming months, even though it's already down over 60% from 52-week highs. Its restaurants are in high population areas with some of the strictest COVID-19 measures, including its home market of New York, sending sales down 70%. While it has enough liquidity to survive for now, it may struggle in coming quarters to recapture its former business.  

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Shake Shack Inc. Stock Quote
Shake Shack Inc.
$47.05 (3.11%) $1.42
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,544.17 (2.62%) $39.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.