The Aussie burrito-maker that makes Nvidia look dirt cheap

This week, giddy investors rammed AI hardware maker Nvidia to the top spot of the world’s most valuable companies, with a $5 trillion market capitalisation and a price-to-earnings ratio of about 78. The latter means investors are willing to pay $78 for every dollar of profit the company generates, in the hope that future growth will make it a good deal.

On Thursday, Mexican-inspired fast food operator Guzman y Gomez made its stock market debut and Aussie investors said: hold my burrito.

Guzman y Gomez’s $300-million man, co-CEO Steven Marks, at the ASX on Thursday when the company made its public debut. Credit: Dominic Lorrimer

The group, which was already being criticised by some professional investors for an eye-watering valuation ahead of its public float, watched investors drive the share price up 36 per cent, or $8, to $30. It was the most successful initial public offering (IPO) on the local bourse in years.

And with a $3 billion valuation as of Thursday evening, it puts GYG on a “mind-boggling” price-to-earnings (PE) ratio of 500, according to IG market analysts.

At these levels, the burrito maker is making Nvidia – which has had its shares soar 2600 per cent in five years – look like a stodgy underperformer.

Just to remind everyone, Nvidia is regarded – with some credibility – as the hottest play in artificial intelligence, a technology that promises to be at least as transformational as the internet.

Guzman y Gomez is an Australian-made Mexican fast food operator, co-founded by former Wall Street investment banker and co-chief executive Steven Marks.

GYG’s ties to Mexico appear to be limited. The company’s prospectus mentions some charity work in the country and the role of Marks as the honorary consul of Mexico for NSW until April, when the IPO started to heat up.

But that is not what should be occupying the minds of investors right now.

The big question for those who bought millions of shares at $30 a pop on Thursday is: what does the company have to do to justify this price?

The answer: it had to meet some pretty astounding growth targets to justify its valuation even before its soaring debut on Thursday.

The big goal – aside from exporting its Mexican-inspired business from Australia to the world – is to grow its Australian footprint from 185 stores to more than 1000. This would match the local footprint of fast food giant McDonald’s.

This would also give it a bigger footprint than pizza juggernaut Domino’s, which has about 700 outlets in Australia and a $3.3 billion valuation from 3800 stores globally.

For Marks and GYG, the aspirational comparison is US/Mexican fast food giant Chipotle, with a market valuation of $US88 billion ($132 billion) and 3500 stores.

The good news is that Marks, who has been a promotional dynamo for the business, has as much on the line as any other investor.

He did not sell any shares into the public offering and watched as the value of his shares and options soared to $300 million as of Thursday’s closing share price.

It means he is completely exposed to the roller-coaster ride that will ensue if GYG does not hit its very aggressive growth targets.

And speaking of growth targets, it might not be a coincidence that the share price deflated more than 5 per cent on Friday morning when the Australian Financial Review unveiled documents from GYG shareholder TDM Growth Partners dated from 2018 with earnings and store-growth targets for the 2022 and 2023 financial years.

While these forecasts were not from GYG itself, the AFR reports that GYG fell short on both the store count and earnings forecasts ahead of the IPO.

It could also be views from analysts like Morningstar’s Johannes Faul, who initiated coverage with a fair value of just $15 per share.

“Guzman looks expensive,” Faul said. “We think the market takes a different view on Guzman’s long-run prospects – namely, how long the company can keep building stores that generate excess returns. Granted, Guzman’s Australian restaurant economics are very attractive now.”

But maybe the final word should belong to Marks, who knows exactly what the risks and rewards are.

“Obviously, we can’t choose if people buy or sell,” he said after the stock’s debut on Thursday. “We [have] just got to run our business and make sure that, you know, as a senior leadership team, that we deliver [on the] strategy.”

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.