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.
Image source: Getty Images
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.
