Unwrapping the GYG IPO

GYG went public today with a hotly anticipated listing on the ASX.

It soared 36% on debut, which wasn't a surprise given the relentless hype. The past few months are a masterclass in publicity and branding.

To me, GYG looks every bit like the next stock crash and tell-all Netflix doco. The enormous multiples on predicted revenue are being driven by a brilliantly executed marketing strategy (and supply-side control / scarcity, but let’s not get into that).

For everyone who invests – and particularly the retail investors who will be left holding the bag – I hope I'm wrong. But here's why I think I'm right.

GYG is a currently unprofitable business. The valuation is ridiculous. They're raising capital from the public to execute a very involved, large-scale, multi-location rollout strategy in the hope that this makes the company profitable. Anyone investing today is investing in the hope of future earnings.

There’s no malice here. I like GYG’s product. I admire the ambition (entrepreneurs make the economy tick). The revenue growth is impressive by any measure. I've had great experiences in GYG's restaurants. Aspects of the marketing strategy are excellent and other brands can learn a lot.

But this cash intensive, indefensible, currently unprofitable business has more red flags than Pamplona. Let's unwrap the burrito. The IPO prospectus is here.

Here's my habanero take:

• GYG values the business at AUD$2.2 billion. This is a significant increase on the most recent capital raise (valuation AUD$1.76 billion, six months ago). I don't see anything that justifies this leap, do you? On closing today, the valuation has passed $3 billion.

• AUD$2.2 billion is 30x the FY25 EBITDA forecast. Forecast. EBITDA is expected to be negative for FY24. For FY25, EBITDA is predicted to be AUD$6 million on revenue of over $400 million – that's a predicted EBITDA (not profit) of 1.5%. 1.5%! Again, this is EBITDA, not profit. The margins are woefully slim.

• EBITDA can be cut several ways depending on the narrative. Where are the real NPAT (net profit after tax) numbers for GYG? Revenue is on an absolute tear, but only profit can illustrate how strong the fundamentals are.

If the above is obvious to me, it'll be obvious to a lot of others. Yet the stock still popped today – that's the pull of a strong brand, a great narrative and a relentless publicity cycle. Let's see where it's at 3-5 years from now when the 12 month escrow term is well and truly over for today's largest shareholders.

If profit doesn't improve significantly and key shareholders dump and run, there will need to be a constant new narrative to sustain the hope of future earnings. It will take a continued masterclass in publicity and branding to maintain value.

This isn't financial advice. My expertise is marketing and technology. I'm unqualified in finance and for those left holding the bag I hope I'm wrong. Do with this what you will. Wishing you good luck!