2 Expensive Looking Stocks to Buy if the Market Sell-Off Continues
The market has gone on a wild ride this summer. Take the Nasdaq-100 index. In early July, it hit an all-time high, then subsequently fell over 10% in less than a month. Now, it has begun to rocket higher again, recovering most of these losses in the first half of August. Volatility is normal in the stock market, but this has been a wild ride for growth investors so far in 2024. Even if the financial pundits seem like they are confident when predicting the next direction for stocks, it is a coin flip when looking out just a few quarters (or even a few years).
Stocks could head lower for the rest of 2024. If they do, you should be prepared in advance for what companies you want to buy. Here are two expensive-looking stocks to add to your portfolio if the market sell-off resumes.
Shopify: powering e-commerce and pricing power
Our first look is Shopify (NYSE: SHOP), one of the largest technology companies in Canada. It operates a software and payments platform that helps retailers seamlessly sell products online on their own websites as opposed to using large aggregators such as Amazon. The stock has posted a 2,800% total return since going public in 2015, crushing the broad market indexes such as the S&P 500.
A lot of this has to do with Shopify's impressive financial success. As the leading e-commerce software platform, it now has hundreds of thousands of businesses thriving because of its software tools. Customers generally pay a monthly subscription fee to access Shopify's software tools, ranging from $29 a month for small businesses to thousands of dollars a month for larger enterprises. Subscription revenue has grown at an astounding clip. Back in the second quarter of 2015, Shopify subscription revenue was $25.5 million.
Last quarter -- Q2 of 2024 -- subscription revenue hit $563 million. It was still growing at 27% year over year due to a growing customer base and price increases Shopify has implemented with little impact on churn. Add in the fast-growing payments processing service, and Shopify's revenue has grown by a whopping 7,290% since going public. Over the last 12 months, it has generated $7.8 billion in revenue and $1.3 billion in free cash flow.
I have confidence that Shopify will keep growing its sales and free cash flow in the years to come. But today, the stock looks expensive. At a market cap of $96 billion, it trades at a price-to-free cash flow (P/FCF) of 74 based on its trailing cash flow generation. This is significantly higher than the market average, which is not a risk I would be willing to take by buying Shopify stock today. This is a high-quality business, but one you should buy at a cheaper price. Keep Shopify stock on the watchlist in case the stock market sell-off resumes.
Chipotle: how much is a burrito chain worth?
Our next company is one that more readers will know about and have interacted with: Chipotle (NYSE: CMG). Like Shopify, the burrito and Mexican bowl restaurant chain has posted some impressive growth figures this century, leading to some monster stock gains. Since going public in 2006, revenue has grown by 1,360% as Chipotle opens up more and more restaurants across North America.
The company has put up impressive growth figures and looks to be taking market share from other restaurant chains. For example, in 2024, a lot of restaurants have seen weakening comparable sales growth, which measures revenue growth from existing locations. Inflation has been subsiding, and consumer spending in the United States is weakening. Despite this, Chipotle posted 11.1% comparable sales growth last quarter.
Strong growth has pushed Chipotle's stock to a higher earnings ratio. It currently has a price-to-earnings ratio (P/E) of 51, which is around double the S&P 500 average. Unlike Shopify, Chipotle is not a rapid grower. It can post durable revenue growth, but you can only open up so many restaurants in a calendar year. This puts a ceiling on its growth capacity.
For this reason -- and the fact the company is much larger than it was even five or 10 years ago -- Chipotle stock looks expensive at current prices. Investors shouldn't forget that the CEO, Brian Niccol, and the CFO have announced their departures from the business. New management creates uncertainty: Will they screw up the growth formula of the last two decades? Investors do not know the answer today, which creates a risk for anyone buying at current prices.
Keep Chipotle stock on the watchlist and wait for a potential stock market sell-off. The price you pay for a stock matters, even for a high-quality one such as Chipotle.
Should you invest $1,000 in Shopify right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brett Schafer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill, and Shopify. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
2 Expensive Looking Stocks to Buy if the Market Sell-Off Continues was originally published by The Motley Fool