On Aug. 12, Mister Car Wash (MCW 2.21%) issued its first quarterly earnings report since its initial public offering (IPO). For the period covering the second quarter of 2021, it reported soaring revenue, comparable sales growth, and positive adjusted earnings per share.

These successes seem like they should make a splash in the stock market, yet in response to the report, the company's stock plunged, then continued a slower decline well into the next week. In finding out why the market is dubious about the car wash company, a closer look at its fundamentals reveals what could be the true reason behind this seemingly bearish sentiment.

Winning metrics for the company's first public report

A cursory glance at Mister Car Wash's first-ever earnings report as a publicly traded company makes its stock market plunge following the release look illogical. The company turned in what can only be considered successful results.

It describes itself as America's biggest car wash chain with a presence in 21 states and 351 total locations, and its revenue set a record in the second quarter after popping 93% year over year, to $197.1 million. Revenue also jumped 25% relative to the pre-pandemic second quarter of 2019. Adjusted earnings per share rose from breakeven in the same quarter in 2020 to $0.14 in 2021.

Six-month net revenue and comps for 2021 both grew compared to the first six months of 2019. Mister Car Wash also provided full-year 2021 guidance, forecasting 30% net growth in revenue, a 29% to 33% surge in comps, and adjusted EPS of $0.39 to $0.44 per share.

A car going through a car wash.

Image source: Getty Images.

During the second-quarter earnings conference call, CEO John Lai said the company is still working "to build a true national car wash company and scale it to even greater heights," adding that "a strong culture drives strong performance, and we're executing at a high level right now and clicking on all cylinders." He went on to describe how Mister Car Wash's subscription model has built a base of 1.5 million members and that the enterprise generated 39 consecutive quarters of positive same-store sales growth pre-COVID, while it was still privately held.

Why, then, did the stock take a nosedive after the report? The answer lies in its current valuation.

Valuation versus reality

The case of Mister Car Wash makes it appear that at least some post-lockdown IPOs may be similar to meme stocks, simply with a different set of investors. Two of the most famous meme stocks (GameStop and movie theater company AMC Entertainment Holdings) saw their stocks soar enormously earlier this year thanks to the actions of millions of retail investors coordinating on the WallStreetBets Reddit sub-forum.

Calling themselves "apes" after the Planet of the Apes army that says it's stronger together, these retail investors inflated the stock prices of those two companies who were previously declining toward bankruptcy. The retail investors' enthusiasm caused them to bid the stocks up to startling multiples of the previous prices, effectively decoupling share from the actual performance of GameStop or AMC, which prior to the Reddit-driven short squeeze saw declining revenue, mounting debt, and a slide toward possible failure for years.

It almost appears that institutional investors are now treating IPOs in the way WallStreetBets' "apes" treat GameStop and AMC, bidding their valuation up based on speculative frenzy and enthusiasm in the wake of COVID's retreat, rather than valuing them according to the actual performance of the underlying businesses. One example is Lordstown Motors, which made its stock market debut with $675 million in funding despite not having a fully functional prototype at the time of its IPO, or any actual production of vehicles.

Other examples of overheated investor enthusiasm followed by a return of somewhat more cold-blooded reality include cryptocurrency exchange Coinbase, the stock of which launched at $381 per share, giving the company a princely $85 billion valuation, but has since seen its value tumble to around $250 to $260 per share, and artificial intelligence company C3.ai, which investors caught up in the late 2020 IPO frenzy bid up to $161 in December and again to nearly $169 in February 2021, before it fell to the approximate $45 to $55 range it has traded at for over a month.  

Immediately after its June IPO, which was carried out without a merger with a SPAC (special purpose acquisition company), Mister Car Wash's value reached more than $6 billion. Its market cap is still $5.9 billion after the stock shed more than 10% of its value over the past five trading days as of this writing, putting its valuation somewhere in the same ballpark as ATV and snowmobile manufacturer Bombardier Recreational Products, motorcycle maker Harley-Davidson, or retail chain Macy's.

The fact that this is a steep valuation for a chain of car washes is additionally highlighted by its trailing P/E ratio. As of mid-August, its P/E ratio is approximately 76.4, meaning investors are paying $76.40 for every $1 of earnings produced.

Publicly traded car wash companies are in scarce supply. But comparisons to the P/E ratios of companies in adjacent sectors -- such as auto parts sellers AutoZone, with its 17.8 P/E, or O'Reilly Automotive with a 21.5 P/E, and gas station and convenience-store chain Casey's General Stores at a 23.7 P/E -- suggest Mister Car Wash may be overvalued. 

Other auto-care companies appear to have a P/E in the range of 18 to 25. Even taking the upper end of this range as a reasonable valuation, Mister Car Wash looks overvalued by approximately 3 times, possibly meaning a $6 price per share would more accurately reflect its worth and performance than the current $18. That might be a bit low given its growth, but it still puts a spotlight on the stock's probable overvaluation.

Mister Car Wash is clearly profitable and growing, but its share value is likely too high in the context of the auto-care sector. Fools investing in automotive stocks or retail stocks related to cars have plenty of other options while market correction occurs and the company's stock price eventually seeks and finds a more realistic equilibrium.