Is It Time to Buy Shake Shack Stock?

Shake Shack (SHAK) stock is under pressure. The company announced lower-than-expected sales in the third quarter. Notably, the stock more than doubled by August 2019. However, the third-quarter sales miss and lower sales expectations weighed on the stock.

Shake Shack stock lost significant value

For instance, Shake Shack stock closed 31.3% higher in 2019 and erased most of its gains. Notably, the stock has lost about 40% in the last three months.

Shake Shack stock is trading about 44% lower than its 52-week high of $105.84. Moreover, the stock is trading about 38% higher than its 52-week low of 43.18.

In comparison, Chipotle Mexican Grill (CMG) and Wendy’s (WEN) shares witnessed healthy buying in 2019. Chipotle and Wendy’s stock closed about 94% and 42% higher in 2019.

What’s impacting the stock?

Shake Shack has a long history of beating Wall Street analysts’ estimates on the revenues front. Stable comps growth and new shack openings supported the revenues growth. The company’s third-quarter sales miss didn’t sit well with investors. Also, Shake Shack’s third-quarter comps growth was below the forecast.

Shake Shack’s Grubhub transition took a toll on its comps growth in the third quarter. Also, management expects the transition to continue to impact its comps in the coming quarters, which is reflected in the reduced guidance.

Shake Shack is moving away from direct point-of-sale integrations with other on-demand delivery partners, including Caviar, DoorDash, and Postmates. The transition will likely hurt Shake Shack’s delivery revenues and comps.

What’s in store for Shake Shack stock in 2020?

We see a limited downside in Shake Shack stock. Recently, the significant decline in the stock reflects negatives and could act as support. However, the upside in the stock could also be limited. Pressure on the comps will likely restrict the upside.

Analysts’ estimate indicates that Shake Shack’s bottom line could decline in 2020. For instance, Wall Street analysts project a mid-single-digit decline in Shake Shack’s bottom line in 2020.

On the top-line front, we expect Shake Shack to continue to produce double-digit growth. Higher licensing revenues and opening new shacks could continue to boost the company’s revenue growth in 2020. Analysts expect more than 20% growth in Shake Shack’s top line in 2020. However, the comps growth could stay low.

We think that Shake Shack stock’s high valuation and pressure on the comps and EPS in 2020 could play spoilsport.

Analysts see upside in the stock

Most of the analysts are on sidelines on Shake Shack stock. However, analysts’ target price shows a healthy upside in the stock. Analysts have a target price of $75.86 on the stock, which implies an upside of about 27% based on its closing price of $59.57 on Tuesday.

Notably, 11 analysts recommend a “hold,” five recommend a “buy,” and one recommends a “sell” on the stock.