1 Number That Has to Change Before I Buy Shake Shack Shares

Fast-casual dining chain Shake Shack (NYSE: SHAK) had a big year in 2025. The company announced a massive expansion plan that would more than triple its store count to 1,500 company-owned and licensed locations. The one-time hot dog stand opened 30 new stores as of its third-quarter 2025 earnings report, with plans to ramp that up to 55 to 60 new stores in 2026.

Perhaps most impressively, it delivered same-store-sales growth of 4.9% year over year, at a time when fast-food traffic declined 1.1% nationwide, according to the data company Revenue Management Solutions. To pull off mid-single-digit same-store sales growth in 2025 strikes me as a huge achievement, considering how fast-food executives are lamenting challenging macroeconomic conditions and pinched consumers in seemingly every earnings call.

For context, Chipotle Mexican Grill just saw its first same-store sales decline in 20 years, while Wendy's shares are down 43% in a year in which the company announced a 4.7% slump in same-store sales and plans to close hundreds of U.S. stores. Arby's closed dozens of stores across America in 2025, while McDonald's CEO Christopher Kempczinski announced a 10% slump in lower-income customer visits in Q3 amid a "challenging" pricing environment.

You can see the sector's pain in the performance of AdvisorShares Restaurant ETF (NYSEMKT: EATZ), an exchange-traded fund that allocates at least 80% of net assets to companies dealing primarily in the restaurant business. Over the last 12 months, as the S&P 500 returned 18.5%, the fund eked out a 2% gain.

But by every measure except one, Shake Shack has been a rare bright spot in the industry. Apart from its growing same-store sales and robust store openings, it also grew its restaurant-level profit by 180 basis points, bringing its restaurant-level profitability to 22.8% as of the third quarter. For context, the average restaurant-level profit margin typically ranges from 3% to 6%.

Most strikingly to me, it posted its 19th consecutive quarter of sales growth in Q3. That means that, even as inflation hit 9.2% in mid-2022, Shake Shack was able to grow sales that quarter, while much larger competitors like McDonald's saw a 3% slump.

A lesson in pricing power

Over the last 19 quarters, Shake Shack has repeatedly raised prices, yet customers just keep coming back. In 2024, same-store sales rose 4.3% despite price hikes, and at the end of that year it was named the most overpriced fast-food chain in a survey by Preply. Yet, it regularly gets away with passing along higher costs to consumers, even as its restaurant-level margins keep climbing.

Image source: Getty Images.

That's called pricing power, and Warren Buffett explained it well when he told students at the University of Florida about one of his all-time favorite investments, his $25 million purchase of See's Candies. At the time of his purchase, See's sold candy for $1.97 per pound. Yet it was able to raise prices every year for a decade by 11.4% a year, on average, while selling more volume each year. Pricing power was, Buffett asserted, one reason he knew that this eventual 8,000% winner was a great business.

Like See's Candies, Shake Shack has shown it can raise prices with impunity. That indicates a special business -- yet shares slumped in 2025. And unlike See's Candies, I don't think buying Shake Shack today will result in an 8,000% gain, or necessarily any gain at all. Here's why.

Severe overvaluation tilts the odds against investors

Shake Shack's price-to-earnings ratio of 98 is more than triple that of the average S&P 500 company. It's over twice as expensive by the numbers as Nvidia, the artificial intelligence (AI) darling with a P/E ratio of 45, that at least is growing earnings by 65% year over year.

To put this in perspective, Shake Shack could post 100% earnings growth overnight and still be more expensive than the hottest stock of the $15.7 trillion AI revolution. When a stock is this overvalued, it tilts the odds against investors, because a company that's "priced for perfection" oftentimes can do nothing but disappoint.

Shake Shack is an intriguing and impressive enough company that I might buy shares of at a modest premium, but this nosebleed valuation is too much. Investors would be well advised to wait for a more favorable entry point before buying shares.

William Dahl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends the following options: short March 2026 $42.50 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.