Would I be crazy to buy Guzman y Gomez (GYG) shares at $30?

The GYG share price had a stunning start on the ASX. Has it gone too high?

| More on:
A woman throws her hands in the air in celebration as confetti floats down around her, standing in front of a deep yellow wall.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Guzman y Gomez Ltd (ASX: GYG) share price soared more than 30% on its first day on the ASX, trading at around $30. Investors that bought shares at $22 are already sitting on big gains.

Interested prospective investors now face a difficult question: Is the Mexican food business a good investment or too expensive?

I wrote several days ago that I planned to buy GYG shares. After seeing such a strong rise on the opening day, I decided not to buy at $30 on the first day amid the strong buying interest.

Why did the GYG share price pop?

Put simply, a large number of investors wanted to buy while not many shares were for sale. The management and large institutional investors seemed to want to keep their shares, so buyers had to pay what sellers were asking for if they wanted shares on the first day.

According to reporting by the Australian Financial Review, Cyan Investment Management's Dean Fergie believes it was fear of missing out (FOMO) that led to the huge increase in the Guzman y Gomez share price. Fergie said:

I feel the whole price is a bit engineered, there's not a lot of free float, so you're not getting new buyers in there. And the people that are in there have an incentive to keep the share price high in the short term.

If you're a big fund with a pile of money, you're probably going to be buying a few shares to keep the price nice and high … so my cynical view is that until all the escrows are out and there's a bunch of free float for the stock, I don't know how relevant the actual price is for the long-term valuation.

I feel the bottom-line earnings numbers, even taking into account potential growth going forward, just don't stack up from a valuation perspective – I'm a fundamental bottom-line investor rather than a hype and excitement kind of guy.

There's two sides of the coin, you've got people who are invested and they're either believers or want to ride the hype and they're pumping it up, and then there are others like me that aren't involved and saying this just doesn't make any financial sense.

Is the Guzman y Gomez share price good value?

It must be noted that the IPO price was $22 (and franchisees were able to buy shares through the IPO offer at $18). Shares issued through the IPO will be allotted on 24 June 2024 and can be traded on 25 June 2024.

Once some new shareholders see they can sell their shares at a good, quick profit, I wouldn't be surprised to see the GYG share price move back at least a little towards the listing price of $22.

If investors believe GYG can become a much bigger business in five years, then today could represent a good price for the long term, but I expect it to see a lot of volatility.

The business now has a market capitalisation of $3 billion, and it's expected to generate underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) of $43 million in FY24. That puts it at around 70x FY24's underlying EBITDA, which looks high to me, at least for the short term.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

Two funeral workers with a laptop surrounded by cofins.
Opinions

2 exciting ASX 300 shares on sale right now

I’m bullish about these exciting businesses.

Read more »

A male investor wearing a white shirt and blue suit jacket sits at his desk looking at his laptop with his hands to his chin, waiting in anticipation.
Opinions

Is it time to buy these 2 beaten-up ASX shares in 2025?

These stocks have dropped this year. Are they some of the best opportunities on the ASX?

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Opinions

Too high? These 2 ASX shares might be due for a correction

These popular blue chips are looking dicey to me.

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
Opinions

The ASX 200 is approaching its all-time high. Here's why I'm not buying shares

I'm not seeing what the broader market is.

Read more »

Warren Buffett
Opinions

Three ASX 200 shares Warren Buffett could buy

If Warren Buffett had to add three ASX shares to his portfolio, he would likely look at these three top…

Read more »

A young woman sits with her hand to her chin staring off to the side thinking about her investments.
Opinions

Could Soul Patts shares hit $50 in 2025?

This company jumped more than 16% yesterday.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Opinions

3 great lessons I learned being an owner of Brickworks shares

I’m going to take these lessons with me.

Read more »

A bricklayer peers over the top of a brick wall he is laying with a level measuring tool on top and looks critically at the work he is carrying out.
Opinions

The pros and cons of the Soul Patts and Brickworks merger

This is a big deal. What are the positives and negatives of the merger?

Read more »