Shake Shack Shares Too Rich for Wall Street's Taste Buds

Shake Shack’s hearty burgers and fries continue to hit the spot with diners. But the company’s shares are struggling to remain a tasty treat for investors.

Two major banks this week downgraded Shake Shack’s shares, putting more pressure on a stock that has now tumbled more 45% from its peak in May. Morgan Stanley levied a downgrade on Tuesday, which was followed two days later by rival Goldman Sachs.

The market value of Shake Shack has ebbed from $3.37 billion to around $1.8 billion currently.

Goldman Sachs on Thursday downgraded Shake Shack’s stock to a “sell,” saying that even with the sell off in shares, the stock still trades at a level that is too rich to justify the potential near-term rewards. Also worrisome: the lockup period for Shake Shack expires on July 29, which is when insiders will be allowed to sell their shares. Goldman points to research that suggests stocks often underperform in the weeks leading up to and following a stock’s lockup expiration.

But what about Shake Shack’s business model? That still looks strong to analysts that track the company. Goldman, for example, said there is a lot of opportunity to open new restaurants and the Shake Shack brand still remains relevant with millennials and performs well on Google searches, implying traffic growth will continue. Revenue continues to increase sharply.

The fast-casual purveyor, which debuted a chicken sandwich this week, isn’t the only recently public restaurant chain to experience some pains on the stock market. Noodles & Co. and Potbelly have each seen their share prices ebb as expectations were set a bit too high for their restaurant concepts. Investors have been putting high valuations on many newly public restaurant chains with the hopes they can become the next Panera or Chipotle, but the path to achieve that growth isn’t always as smooth or as quick as investors might hope for.