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Is Shake Shack Stock a Buy?

By Jon Quast – Updated Apr 18, 2021 at 12:39AM

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The stock is already pricing in a lot of the company's growth opportunities.

Shares of better-burger company Shake Shack (SHAK -2.33%) have already hit all-time highs earlier in 2021. But 2020 wasn't an all-time good year for this business. The company is highly concentrated in urban areas, and these faced some of the toughest dining restrictions last year from the pandemic. Because of this, last year's revenue was down 12% from 2019.

Business results, therefore, haven't sent Shake Shack stock to all-time highs. Rather, investors are excited about what the company is cooking up for growth. In fact, it's about to enter its greatest growth phase ever.

A row of sequentially taller plants are hand watered with a rising sun in the background.

Image source: Getty Images.

It's time to shine

Shake Shack management was able to turn investors' attention from past difficulties to future opportunities by presenting an impressive pipeline of new restaurant locations. The company has both company-owned restaurants and licensed international locations. But when it comes to those that are company-owned, the most it's ever opened in a year was 39 back in 2019. 

For 2021, Shake Shack plans to open 35 to 40 new company-owned locations. In 2022, it's planning to open 45 to 50 -- more than 2019's record number. For perspective, the company finished 2020 with 183 company-owned restaurants. Therefore, its store count is expected to grow roughly 45% over just the next two years. That's ambitious. 

And because of some financing moves in 2020, Shake Shack ended the year with almost $147 million in cash -- its most ever. Consequently, it's well capitalized to pursue its aggressive growth plans.

It's important to note that company-owned restaurant growth is more meaningful for shareholders than growth with licensed locations. Shake Shack is planning for licensed growth as well, with 15 to 20 such locations in 2021 and 20 to 25 in 2022. But licensed stores don't drive top-line growth like company-owned stores do. With licensed locations, Shake Shack reports license fees as revenue rather than restaurant sales, but sales volume is the bigger number. 

A mature man strokes his chin in thought.

Image source: Getty Images.

Why it might not be a buy right now, though

Armed with cash and poised for robust growth, Shake Shack is in a good position for the future. Furthermore, restaurant sales are improving. Suburban Shake Shack locations had already returned to growth earlier in 2021. And regions like the U.S. Southeast are approaching a full sales-volume recovery. One would expect this to continue throughout the rest of the year as the coronavirus vaccines continue to be distributed.

But much of Shake Shack's future growth has already been priced into the stock, as the chart below suggests.

SHAK PS Ratio Chart

SHAK P/S ratio data by YCharts.

Shake Shack stock has never traded for a higher price-to-sales ratio than it does right now. Based on this, I could see the stock either pulling back or trading sideways until the company's revenue has a chance to catch up. It's hard to imagine another catalyst sending shares higher in the short to medium term.

Zooming out further

I believe long-term, buy-and-hold investing is the best strategy. For Shake Shack stock, I foresee better chances of positive returns the longer you hold. That's because the company's profit situation should only get better over time. Certain expenses like general and administration have scaled over the years and should keep scaling with a larger restaurant base.

When Shake Shack went public, it was targeting 450 U.S. company-owned locations. Management doesn't regularly talk about long-term targets anymore, but it's safe to assume the ceiling for this brand is somewhere in that ballpark. Therefore, its present growth plans will take it much closer to being a mature business rather than a trendy newcomer.

As it matures and corporate expenses scale, Shake Shack could shift focus to profitability and capital allocation. It won't happen overnight. But this whole process could create positive shareholder returns from today. That said, I'm not sure it will be enough to beat the market.

The bottom line: Shake Shack is a strong brand with big plans. But the stock is pricey right now. Historically for this company, a price-to-sales ratio of 3 has been an opportunistic entry point. For now, you could wait for a better entry. But if you buy today, be prepared to hold for a long time to increase your chances of making money on your investment.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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