NEW YORK (MarketWatch)—Investors salivated over Shake Shack Friday, sending the stock more than 125% above its issue price in the first moments of trade. Investors are now asking whether the New York-based burger phenomenon will be able to sustain its meteoric rise.
Read: Shake Shack shares more than double in market debut
Habit HABT, -0.67% voted best burger in America by Consumer Reports in 2014, went public in November, pricing its IPO at $ 18 a share. The stock reached a high of $ 42.83 in December, but has since fallen back, and was trading Friday at about $ 33 per share.
Venture capitalist Peter Cohan, president of management consulting and venture-capital firm Peter S. Cohan and Associates, acknowledged the initial rally was inevitable, but holds that it is simply hype.
See: 6 things to know about Shake Shack with IPO set to start trading
“I was just telling someone that it reminds a lot of the Krispy Kreme IPO,” Cohan told MarketWatch. In 2000 Krispy Kreme stock KKD, -3.29% opened at $ 32, well above its $ 21 issue price, and then closed at $ 37 on its first day of trade.
“People have that sugary sweet taste in their memory during the IPO and they jump on it,” he said.
While Cohan concedes that Shake Shack has more than one thing going for it, the burger joint’s valuation of about $ 745.5 million is “way too high.” Shake Shack’s revenue growth rate was 41% in 2014, down from 62% the year earlier. And its profit margins have narrowed—to 4.2% in 2014 compared with 7.4% in 2013.
“In order to justify that valuation I would just expect them to be growing at a much higher rate,” Cohan said. “And I doubt they want to increase growth so much that they start to lose quality.”
Shake Shack currently operates 63 restaurants in nine countries. In its prospectus filing with the Securities and Exchange Commission, the company said it plans on opening 10 new Shacks a year in the U.S. starting this year.
Cohan expects the stock to come back to earth, and is forecasting a dramatic pullback come the six-month mark, bringing it back to a more realistic valuation.
See also: Blame falling oil for IPO season’s unspectacular start
