Trouble In Burger Paradise? Morgan Stanley Downgrades 'Expensive' Shake Shack

In a report published Tuesday, Morgan Stanley analyst John Glass downgraded the rating on Shake Shack Inc (NYSE: SHAK) from Equal-weight to Underweight, while maintaining the $38 price target. The analyst believes that the stock is "overpriced," possibly due to the current technical market dynamics, along with brand-related optimism, which is not supported by the company's fundamentals.

The analyst also believes that the current valuation more than compensates for the near-term fundamentals, which are expected to stay strong. For now, Shake Shack's stock appears "expensive," possibly due to a number of factors, such as the "illiquidity" of the shares, with only 5.75 of the total share count of about 37 million shares currently trading in the float.

According to the Morgan Stanley report, the other factors include "expensive "borrow" and limited on stock, making it extremely difficult for investors to express a view on valuation by shorting the stock."

The analyst also believes that "brand-related euphoria" is one of the reasons for the premium valuation, "driven by high profile locations and media attention surrounding the IPO process."

"Some of these contributing factors, such as liquidity and ability to borrow get resolved when more shares become available in the market, likely after lockup expires," analyst Bernstein added.