Guzman y Gomez share price implodes 10% on ASX trading day 2

The Guzman Y Gomez share price is tumbling on Friday. But why?

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The Guzman Y Gomez (ASX: GYG) share price is taking a beating today.

Shares in the Mexican fast-food restaurant chain kicked off their first day of trading at noon yesterday, opening at $30.00 apiece.

That was more than 36% above the initial public offering (IPO) price of $22.00 a share.

Shares hit an intraday high of $30.99 before ending the day back at $30.00. That saw the company with a market cap of some $3 billion.

Today, the Guzman Y Gomez share price is under heavy selling pressure.

Shares were down 10% in earlier trade, swapping hands for $27.00 apiece. At the time of writing, shares are trading for $28.60, down 4.6%.

What's happening with the Guzman Y Gomez share price?

It appears that shareholders who got into the IPO for $22.00 and lucky franchisees who bought shares at $18.00 are taking some profits on Friday.

Yesterday's rally in the Guzman Y Gomez share price appears to have been largely driven by retail investors, anxious to get a slice of this potential growth story.

At the time of the IPO (and today), the Mexican fast-food franchise operates 185 restaurants across Australia.

Management expects the company will increase that footprint by 30 new outlets a year over the next few years, potentially boosting the expansion pace to 40 new outlets a year by 2030. By 2050, Guzman Y Gomez may run as many as 1,000 restaurants in Australia.

The company is also looking to grow overseas, with an eye on the lucrative United States markets. But it plans to move cautiously in that realm.

Commenting on yesterday's 36% surge in Guzman Y Gomez stock, Cyan Investment Management's Dean 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.

Fergie has a good point on short-term valuations.

The company's IPO has been long in the making, and investors shouldn't read too much into these first few days of price action.

For the Guzman Y Gomez share price to rise over time, the company needs to keep costs in check, offer quality food at competitive prices, and deliver on its ambitious growth strategy.

Motley Fool contributor Bernd Struben 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.

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