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The Ratings Game: Shake Shack may take time to recover from COVID, but Goldman Sachs is confident there’s growth ahead

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Shake Shack Inc. stock jumped 7.3% in Tuesday trading after the burger chain was upgraded at both Goldman Sachs and Wedbush, with analysts expressing confidence in the long-term growth prospects for the company.

The stock rally comes after a drop of nearly 21% over the past three months. Shake Shack
SHAK,
+2.58%

reported a quarterly revenue miss earlier this month.

The stock is up 6.9% for the year to date while the benchmark S&P 500 index
SPX,
+0.19%

has gained 11.7% for the period.

“The company’s small size and unique footprint drive a lag in the company’s recovery from COVID, making it one of the last re-opening plays in the space,” Goldman Sachs analysts led by Jared Garber wrote in a note.

Goldman Sachs has a $109 price target on Shake Shack shares.

“We believe the pullback provides buying opportunity for a long-term growth story as the company has a strong balance sheet (>5x more cash vs historical average) to drive its unit development strategy and invest in digital/technology initiatives and new store asset designs.”

Among the enhancements that Shake Shack has planned are an increase drive-thru service and investments in digital.

Read: Shake Shack, a New York City native, is focusing its expansion on the suburbs

Shake Shack has long been geographically focused on urban areas, which have been hit with tourism declines and pressure from disrupted commuting routines. While the company may not bounce back right away, Goldman says the stock pullback is “a buying opportunity for a company with significant growth potential.”

Goldman analysts also note that Shake Shack is one of the smallest chains in the quick-service category with plenty of space to add locations.

“We view Shack Shack’s post-Q1 swoon as overdone,” wrote Wedbush analysts led by Nick Setyan.

Not only is the company seeing a revival in major cities like New York, Los Angeles and Chicago, but Wedbush says the company has a post-COVID addressable market of more than 1,000 locations.

“We continue to view management’s multi-format approach to development post-COVID, including the first drive-through unit in 2021 (up to 8 through 2022) and a heightened focus on Shack Tracks (both drive-up and walk-up windows), as expanding Shack Shack’s long-term addressable market, particularly through an expansion of suburban opportunities.”

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Wedbush moved its Shake Shack price target to $118 from $114.

Goldman Sachs also downgraded Domino’s Pizza Inc.
DPZ,
-0.08%

to neutral from buy after a stock gain of 23.6% over the last three months and “with potential volatility due to same-store sales laps on the horizon.”

Goldman has a $450 price target on Domino’s Pizza.

Domino’s Pizza shares have gained 9.7% for 2021 so far.

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