Morgan Stanley thinks Shake Shack shares are just way too expensive right now — and now the stock is getting crushed

shake shack burgers

(Abdullah AlBargan/Flickr)

Shake Shack shares are getting totaled on Tuesday after Morgan Stanley downgraded Shake Shack.

In early trade on Tuesday, shares of the burger chain were off as much as 10.7%. Near 2:30 pm ET, the stock was down 7%.

In a note to clients earlier on Tuesday, Morgan Stanley took its rating on the burger chain to "Underweight" from "Equal Weight," writing simply that the stock was overpriced.

"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.

In short, the stock has gotten way ahead of itself.

Since Shake Shack went public in late January, shares of the burger chain have almost tripled. The company priced its initial public offering at $21 a share, and after a first-day pop of 123% to $47 per share, the stock traded above $90 in late May before tumbling over the past five or so weeks to close at $58.80 on Monday.

In premarket trade on Tuesday, the stock was down 4.6% to $56.11.

In its note, Morgan Stanley cites three factors for how the stock — which is trading at 325 (!) times projected 2017 earnings — got so expensive so quickly:

1. Illiquidity of shares. Morgan Stanley notes that only 5.75 million shares are trading out of the 37 million share count.

2. Expensive "borrow." About 2.6 million shares are being sold short, or betting that the price will fall, making borrow rates north of 150%. This means investors have to pay an annualized fee that is equal to 150% of the total value of the short position to bet against shares of Shake Shack — a lot of money. Morgan Stanley thinks this is making it "extremely difficult" for investors to "express a view on valuation."

3. Brand-driven euphoria. Because of high-profile Shake Shack locations and media coverage of the IPO process, Morgan Stanley thinks investors have become over-exuberant about the stock.

As for why Morgan Stanley downgraded the stock now, the firm notes that the six-month lockup on the stock will expire in late July, which could pressure shares.

Additionally, the firm adds, "While post IPO euphoria and elevated valuations are not new or unique to SHAK, the difference between what we see as fair value and current market price represents an extreme disconnect."

Here's the wild chart of Shake Shack since its debut, which has still been a big win for investors who got in early but has been ugly for anybody buying over the past couple of months.

SHAK

(Google Finance)

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