Shake Shack’s Chicken Sandwich Is Real and it Looks Spectacular

“While a powerful emerging brand executing on all its early commitments to its investors, [the] stock is overpriced, in our view, potentially reflecting both technical market dynamics as well as “brand”-related optimism that is not supported by fundamentals”, the firm writes””.

The analyst explains that Shake Shack stock is overvalued and there are many factors contributing for that. Secondly, the company has a high short interest resulting in expensive borrowing.

John Glass has a price target of $38 on Shake Shack stock and said there is “an extreme disconnect” between the stock’s price and what it’s actually worth.

As for why Morgan Stanley downgraded the stock now, the firm notes that the 6-month lockup on the stock will expire in late July, which could pressure shares. The lock up period comprise of 180 days after initial public offering (IPO) which restricts company insiders to trade their stock holdings.

And so in short, the stock has just gotten way ahead of itself. Analysts at Morgan downgraded burger joint Shake Shack to UNDERWEIGHT from EQUAL WEIGHT, while maintaining its $38 price target. Since IPO the fast-casual retailer has grabbed many headlines by opening stores at high profile locations and attracting media attention, said the analyst. The firm sees the company’s growing opportunity to upsell customers on its cloud-based services.

The analyst further highlights difference between company’s current market price and fair value. Since that time they have appreciated another 45% and are now 50% above our target and >15% above our bull case.

Despite the likely fanfare that will ensue, Morgan Stanley analysts don’t seem to care.

Shake Shack expects comparable restaurant sales to increase in the low single digits this year, after growing 4.1% in 2014.

Morgan Stanley has also modified their ratings on a number of other stocks in the few days.