Stocks That Look Expensive, But Could Still Outperform

Stocks with expanding valuation multiples (Price-to-Earnings or Price-to-Sales) are typically seen as pricey. However, very often this could also be an indicator that a company is building a competitive advantage in the business it operates in, implying that earnings growth could be stronger going forward. We’ve picked a group of 11 stocks from a variety of industries including Etsy (NASDAQ:ETSY), Chipotle Mexican Grill (NYSE:CMG), MSCI, and Paycom Software that have seen improving fundamentals (revenue and margins growth) as well as rising valuation multiples. See our complete dashboard analysis Trefis Theme: Story Stocks for the detailed list of tickers, and more information on our methodology. Part of the analysis is summarized below.

Etsy ($13 billion market cap, 440% Return since Dec 2017)  has carved out a niche for itself in the e-commerce space, focusing on handmade products, vintage items, and craft supplies, fending off competition from the likes of Amazon Handmade marketplace. The company still has a lot of room for growth. While Etsy’s gross merchandise sales stood at $5 billion in 2019, its total addressable market stands at an estimated $250 billion online for relevant categories it sells and over $1.7 trillion including offline. With the Covid-19 pandemic expected to accelerate the shift online, Etsy’s revenue growth could accelerate.

MSCI ($31 billion, 200%) is a financial data provider that is best known for its financial indices, which money managers use to benchmark investment performance. The company benefits from a subscription-driven model and its revenue base is also very sticky – once customers adopt an index, they are likely locked-in. Moreover, revenue growth could continue, driven by an increasing shift to passive investment strategies. The company’s operating margins have also been trending higher, rising from 42% in 2016 to about 49% in 2019.

Paycom Software ($18 billion, 285%) provides cloud-based human capital management (HCM) and payroll software applications. A bulk of the company’s revenue is recurring thanks to its subscription-based model, and switching costs for its products are also high – once customers get familiar with the process, there’s little reason for them to migrate to alternative cloud-based providers.

Chipotle ($31 billion, 290%) has outperformed the broader restaurant industry. The company is gaining an edge over rivals, driven by its higher-quality ingredients compared to fast-casual peers, improving brand value, and efficient restaurant-level operations. Although demand for dining out has taken a hit through the Covid-19 pandemic, the company could stand to gain market share as many smaller restaurants are unlikely to survive the pandemic.

Insulet ($14 billion, 200%) manufactures insulin pumps for patients with diabetes, helping to manage blood sugar levels by providing small doses of insulin throughout the day. While there are other players in this space, Insulet’s differentiated design and ease of use set it apart from competitors. While the company has been posting steady growth driven by growing adoption and low penetration levels, it also benefits from recurring revenue streams from sales of its insulin pods.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams