Shake Shack Inc (MYSE:SHAK) shares declined more than 2% to as low as $35.78 during regular trading hours on Thursday following a bearish initiation report by analysts at Wedbush. They think the company’s valuation is just too high and implies that its sales opportunity is much larger than what management has guided for.

In addition to Wedbush’s bearish initiation report, analysts at Vetr also downgraded the dining chain from Buy to Hold and set their price target at $37.50 per share.

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Shake Shack initiated at Underperform

In a report dated July 6, analysts Nick Setyan and Colin Radke initiated coverage of Shake Shack with an Underperform rating and $30 per share price target. They believe the dining chain’s valuation will continue to contract as its results demonstrate to Wall Street that its valuation is too optimistic.

They note that management is targeting 450 domestic units at $3 million AUVs, which implies a sales opportunity of $1.35 billion. They do believe that this is conservative, but they don’t believe the $1.3 billion market capitalization is justified, even if Shake Shack ends up showing a much better growth rate and unit productivity.

Near-term upside for Shake Shack is understood

The Wedbush team’s view is one of long-term concern because they understand why Wall Street sees upside to near-term expectations. Shake Shack launched chicken products on its menus this year, and the analysts believe that the chicken items alone could sustain flat to accelerating trends for the next two years, compared to the slight downtick observed in consensus estimates. Their checks suggest upside of more than 1% in the second quarter, adding that opening volumes might again beat estimates because of the number of high-profile new markets and openings in Manhattan.

However, they believe that just like in other recent quarters in which new unit volume and upside to comparable Shack sales pushed expectations higher, Shake Shack will again see its valuation contract while estimates are revised higher.

They note that management revised full-year guidance for new unit volume from $3.3 million to $3.5 million. Additionally, new volumes of $3 million are targeted for next year and beyond. They estimate that unit volume upside could add between 3 cents and 13 cents in upside for earnings per share this year. However, they also believe upside to be less than that because the mix of high-profile market entries declines compared to the mix of openings in markets where there is already a Shake Shack location

The Wedbush team also believes that headwinds to same Shack sales growth could intensify after this year. Because of the strong new unit openings, they don’t expect a multi-year cycle of the kind that has boosted other high-growth restaurant chains. Further, they believe that the strength of the company’s current openings could end up being a drag on comparisons. They also expect cannibalization to intensify.

The Street rates Shake Shack at Sell

Similarly, The Street rates Shake Shack as Sell with a ratings score of D. The website’s analysts see several key weaknesses which they believe to be greater than the company’s strengths. Among the weaknesses they cite is the “generally disappointing historical performance” in its stock. They also believe the dining chain’s profit margins are “poor.”

Shake Shack is due to release its next earnings report on or around August 10. In the last quarter, it posted a classic beat-and-raise quarter, and shares surged following the May release.