Morgan Stanley thinks Shake Shack shares are just way too expensive right now

Morgan Stanley has downgraded Shake Shack.

In a note to clients on Tuesday, the firm took its rating on the burger chain to "Underweight" from "Equal Weight," writing simply that the stock is overpriced.

"While a powerful emerging brand executing on all its early commitments to its investors, [the] stock is overpriced, in our view, potentially reflecting both technical market dynamics as well as 'brand'-related optimism that is not supported by fundamentals," the firm writes.

And so in short, the stock has just gotten way ahead of itself.

Since going public in late January, shares of Shake Shack have almost tripled. The company priced its initial public offering at $21 per share, and after a first-day pop of 123% to $47 per share, the stock traded above $90 in late May before tumbling over the last 5 or so weeks to close at $58.80 on Monday.

In pre-market trade on Tuesday, the stock was down 4.6% to $56.11.

In its note, Morgan Stanley cites 3 factors for how the stock - which is currently trading at 325 (!) times 2017 earnings - got so expensive so quickly:

1. Illiquidity of shares. Morgan Stanley notes that there are only 5.75 million shares trading out of the 37 million share count.
2. Expensive "borrow." There are around 2.6 million shares being sold short, or bet that the price will fall, making borrow rates north of 150%. This means investors have to pay an annualized fee that is equal to 150% of the total value of the short position to bet against shares of Shake Shack - a lot of money. Morgan Stanley thinks this is making it "extremely difficult" for investors to "express a view on valuation."
3. Brand-driven euphoria. Due to high-profile Shake Shack locations and media coverage of the IPO process, Morgan Stanley thinks investors have become over-exuberant about the stock.

As for why Morgan Stanley downgraded the stock now, the firm notes that the 6-month lockup on the stock will expire in late July, which could pressure shares.

Additionally, the firm adds, "While post IPO euphoria and elevated valuations are not new or unique to SHAK, the difference between what we see as fair value and current market price represents an extreme disconnect."

Here's the wild chart of Shake Shack since its debut, which has still been a big win for investors who got in early, but has been ugly for anybody buying over the last couple months.