Guzman y Gomez Shares (ASX: GYG) Deliver a Year of Two Halves Since IPO

Guzman y Gomez (ASX: GYG), the darling of the Australian fast-casual Mexican food scene, is facing a reality check as its stock price experiences downward pressure. Today’s session saw the GYG share price drop 3.31% and close at A$28.04, below the first trading action above $29 just over a year ago.

GYG’s journey since its IPO has been a rollercoaster. With shares having rallied more than 50% into February’s highs ($45.99), the decline that has followed has been sharp (38%). While the company boasts impressive network sales growth, reporting a 23.6% increase in total network sales for Q3 FY25, the underlying performance, particularly in the United States, is raising eyebrows. A reported 12.7% drop in U.S. network sales coupled with increased losses from its American operations back in February cast that shadow over GYG’s ambitious expansion plans and triggered the beginning of the current trend.

This underperformance contributed to first-half underlying EBITDA of A$31.6 million, falling short of both consensus and UBS estimates. The miss on underlying net profit after tax, which came in at A$7.3 million against a market consensus of A$10.8 million, amplified these concerns and triggered a significant 14.3% drop in the share price to A$38.58 at the time.

Adding fuel to the fire are analyst downgrades and cautionary notes regarding GYG’s valuation. RBC Capital initiated coverage with an “underperform” rating and a price target of A$32.00 back in October 2024, citing the steep valuation following the IPO surge and the nascent stage of GYG’s U.S. presence. The firm rightly pointed out that the Australian market’s relatively smaller scale warrants a more cautious approach to valuation compared to U.S. peers operating in a significantly larger market. Similarly, Morgans downgraded GYG to a “Hold” rating with a price target of A$37.70, echoing concerns over valuation and future growth prospects.

Looking ahead, Guzman y Gomez is slated to release its earnings on August 27, 2025. While forecasts suggest the company is on track to beat its prospectus forecasts for FY25, driven by strong comparable sales growth in Australia, the market will be keenly watching for updates on the U.S. turnaround strategy and any revisions to future growth projections.

The key to GYG’s future success may well hinge on its ability to navigate the challenging U.S. market, address valuation concerns, and deliver on its growth promises. While some analysts, like those at Morgan Stanley who maintain an “Overweight” rating, remain optimistic about same-store sales growth and margin improvements, the company must demonstrate tangible progress in its U.S. operations to regain investor confidence and justify its current valuation.

The next earnings release will be a crucial test, providing valuable insights into the company’s strategic direction and its ability to execute its ambitious growth plans. GYG’s ability to refine its expansion strategy, manage costs effectively, and maintain its brand appeal will ultimately determine whether it can reclaim its position as a market darling or faces a prolonged period of market scepticism. The view remains that the Australian market, while strong, is not sufficient to justify the current valuation; international expansion is the key to unlocking it.