Investors usually don’t go looking for the most expensive stocks in the market. But, in recent years, that strategy actually has paid off well.
This has been a market that has focused on growth over valuation. Whether due to low long-term interest rate expectations, a savvy understanding of “megatrends” in key sectors, or something close to a bubble, investors haven’t sold the most expensive stocks at the top. They’ve generally kept buying.
Indeed, some of the market’s biggest winners of the past few years have been the likes of Tesla (NASDAQ:TSLA), Shopify (NYSE:SHOP) and Roku (NASDAQ:ROKU). None of those stocks looked particularly cheap to begin with. All the way up, skeptics (on occasion, myself included) voiced concerns about valuations, but long-term bulls have generated enormous returns.
It’s up for debate whether that trend holds. Again, with so many sectors offering explosive opportunities, there is a case for buying growth at almost any price. There’s an equally reasonable case that at some point, valuation has to matter, and that such a point is on the horizon.
For investors who retain their optimism, there are expensive stocks (if not necessarily the most expensive stocks) that still can provide quality returns from this point. Here are eight of those potential winners:
- Luminar (NASDAQ:LAZR)
- Cloudlfare (NYSE:NET)
- Fastly (NYSE:FSLY)
- Adobe (NASDAQ:ADBE)
- Bandwidth (NASDAQ:BAND)
- Snap (NYSE:SNAP)
- Canada Goose (NYSE:GOOS)
- Amazon.com (NASDAQ:AMZN)
Most Expensive Stocks Worth Buying: Luminar (LAZR)
At this point, there are basically no growth stocks in the auto sector that are cheap. Investors are going to have to pay up for exposure to the growth of electric and autonomous vehicles. In that context, quality matters most.
And it seems like Luminar has one of the better stories in the group. The maker of lidar (light detection and ranging) technology seems to be the industry leader, having passed Velodyne Lidar (NASDAQ:VLDR). ADAS (advanced driver-assistance systems) revenue should allow the company to ramp revenue and possibly reach profitability before the AV trend kicks into high gear.
Again, investors do have to pay up for the opportunity. Luminar has a market capitalization now over $10 billion, yet 2021 revenue likely comes in below $30 million. This story can go south in a number of ways. The long-term risk is competition. In the near term, a pullback across the sector wouldn’t be shocking given how many names (LAZR included) have posted triple-digit rallies over the last six months.
But as I wrote last month, investors who trust the market and the sector should have LAZR on their watchlists. That’s still the case at the moment.
At 41,035x the consensus earnings per share estimate for 2022, NET looks not like one of the most expensive stocks in the market, but the most expensive stock.
Of course, that forward price-to-earnings multiple is inflated by the fact that earnings are expected to be so thin (two-tenths of a penny, to be precise). That aside, NET still does trade at 45x the consensus revenue estimate for 2021, one of the higher multiples in the market.
But this seems to be a story worth paying up for. Cloudflare’s cloud-based solutions combine content delivery with security. The former trend is growing nicely thanks to demand for streaming video and edge computing. The latter is obviously important in this day and age, with Cloudflare allowing corporate IT departments to extend their security off premise and into the cloud.
There are concerns. The first, as with so many stocks on this list, is whether even that impressive growth potential is priced in.
Second, Cloudflare’s business model is different from other software companies in that capital expenditures are rather high. Cloudflare’s network requires worldwide reach, and that in turn requires significant capital. Capex including capitalized software was $75 million in 2020, more than 20% of revenue. That proportion will trend down over time, but this is not a capital-light business like many other software plays.
Finally, 2021 guidance given last week did look a bit soft, with Cloudflare guiding for a deceleration of growth in 2021. As we’ve seen with smaller sector play Limelight Networks (NASDAQ:LLNW), top-line disappointments are punished. NET stock has fallen 10% in two sessions since the release.
In other words, execution risk is high. But given the opportunity for Cloudflare to become an integral part of the internet worldwide, for now the risks seem worth taking.
FSLY is another name that shows the risk of disappointing in the CDN space. Investors bid the stock up aggressively from March lows, betting that the CDN provider would benefit from pandemic tailwinds. But preliminary third quarter numbers in late October were good but not quite good enough. Fastly stock plunged 27% the following day, and another 17% during a seven-session losing streak that followed.
But long term, Fastly seems fine. Those tailwinds are intact. Growth remains impressive. The case for FSLY is that its Q3 will in retrospect look like the stumble at Twilio (NYSE:TWLO). Twilio has gained about 1,600% from 2017 lows.
FSLY isn’t likely to post those same kinds of returns, but there’s still upside ahead. Q4 earnings topped expectations, and guidance suggests another 30% increase in revenue in 2021.
At the moment, that report again doesn’t seem quite good enough, with Fastly stock down in after-hours trading. From here, it looks easily good enough to support the long-term case, and to make FSLY a potential buy on any further weakness.
A year ago, I wrote that ADBE stock was a buy until proven otherwise. Simply put, it hasn’t been proven otherwise.
Adobe earnings have remained strong despite pandemic impacts. Its Adobe Sign offers another potential growth opportunity, even if that business lags DocuSign (NASDAQ:DOCU) in e-signatures. The company’s acquisition strategy remains on point, and management is solid.
Certainly, Adobe stock isn’t cheap. 43x this year’s consensus EPS estimate is a big multiple, one that makes ADBE one of the most expensive stocks in the large-cap group.
But ADBE has seen a bit of a buying pause since August. That consolidation seems like it’s setting up another rally. Yes, the multiple is big, but Adobe simply is one of the best companies out there. ADBE stock shouldn’t be cheap, and it likely won’t ever be for a very long time.
Most Expensive Stocks Worth Buying: Bandwidth (BAND)
This relatively unknown CPaaS (communications-platform-as-a-service) provider has an intriguing bull case. Revenue continues to grow at a healthy clip, with a roughly 40% increase expected in 2020 and high-30s growth likely this year.
Certainly, the market isn’t ignoring BAND stock. Shares trade at about 14x 2020 revenue. But in the context of cloud names, that multiple isn’t completely out of line. Rival Twilio garners a far higher multiple.
Meanwhile, Bandwidth should be able to at least match Twilio on the top line. Bottom-line improvements should follow beyond 2021, thanks to operating leverage in the model and gross margin improvements. The technicals look solid, with BAND challenging resistance for a third time, setting up a potential breakout if Q4 earnings impress next week. Bandwidth even could be a takeover target down the line.
As with other cloud names, investors have to pay up for the potential here. But there’s a lot to pay up for.
Snap has gone from one of the market’s biggest disappointments to one of its biggest successes. In December 2018, SNAP stock touched $5, down more than 70% from its initial public offering price of $17. User growth had stalled out, the launch of Spectacles looked like a disaster, and investors simply had lost faith in the company.
In the 27 months since then, SNAP stock has returned more than 1,100%, including a 207% rally in 2020. Users have returned, social media is hot again, and Snap seems to be on the right track.
In short, investor confidence returned in a big way. As long as that holds, SNAP stock can keep rising. Yes, a 100x forward P/E multiple seems astounding. But Snap still has a lot of runway both in attracting new users, and more importantly, monetizing its existing base.
The nature of the platform model means a healthy chunk of that incremental revenue will drop to the bottom line. The resulting explosive earnings growth can justify that triple-digit P/E multiple in a hurry.
Obviously, Snap must continue to execute. Just as obviously, the rally is going to slow. But as long as the status quo holds with the business, there’s room for more upside in SNAP as a stock.
Canada Goose (GOOS)
I liked GOOS stock coming into 2021. Up 44% year-to-date, the stock still should have some legs.
Yes, the price is higher. But this isn’t a case of the market mindlessly bidding up the stock. Canada Goose’s fiscal third-quarter earnings report earlier this month was a blowout.
On an absolute basis, the quarter doesn’t seem that impressive. Revenue increased just 5% year-over-year. Operating profit actually declined.
But it’s how the quarter played out that cheered investors, who bid GOOS stock up 21%. The revenue growth was the first for Canada Goose since the pandemic hit. E-commerce sales impressed. China, a key export market, is returning to normalcy. Given that Canada Goose still has some stores closed, and is facing significantly lower traffic at third-party channels, even 5% growth looks like a win.
In short, this is a company that looks set to return to its growth trajectory. That projected trajectory was enough to push GOOS to $70 back in late 2018. If growth continues, there’s no reason it can’t get there again, which suggests roughly 60% upside from current levels.
AMZN stock long has had the reputation of being one of the market’s most expensive stocks. On a P/E basis, it’s often looked ridiculously inflated.
Interestingly, that’s actually starting to change. Looking to 2022, analysts now see EPS of $66 (albeit with a very wide range), suggesting a forward P/E multiple around 50x.
That figure sounds enormous. But I’ve long argued that investors shouldn’t use a single metric to value this company, and that’s still the case. It’s worth remembering that Amazon earnings remain deflated by the company’s enormous investments in all sorts of markets.
Some of those investments will pay off. Some won’t. But long term, those investments either provide a return, which boost profits, or get cut, which does the same.
Meanwhile, the cloud business is enormously valuable. Amazon’s dominance of e-commerce remains relatively unchallenged, even with smaller rivals doing well amid the pandemic.
Simply put, this is one of the world’s best companies, yet AMZN stock is as cheap as it’s been in a while. Recent underperformance – AMZN stock has traded flat since July – isn’t likely to hold. The departure of chief executive officer Jeff Bezos could provide an overhang, but from a long-term perspective this pause in AMZN’s rally seems like a buying opportunity.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.