Waiting for a stock to drop to a specific price is a common practice among investors. While this strategy makes sense, it can be risky. The stock may take a long time to drop to the desired price. There's also a risk that it never gets there at all.
That said, there are many great businesses that do have overvalued stock prices, where price does matter for investor returns. Keeping stocks on a watch list to be added at a certain price could be the right strategy. Here are three stocks that are pricey right now but worth buying if they take a dip.
1. Celsius Holdings
Celsius Holdings (CELH -0.65%) is an energy drink company that has been on a mind-boggling run. The stock is up more than 1,300% since May 2020. By comparison, the S&P 500 gained only 49% over the same time frame. Put another way, a $10,000 investment in Celsius three years ago would be worth $146,000 today.
In its recently reported Q1 2023, Celsius posted results that were even more impressive than its usual business performance. Revenue increased 95% to $260 million, but this level of revenue growth is not uncommon. Over the past three years, Celsius has never had year-over-year revenue growth in any quarter below 48%.
Net income for the quarter was $41 million, an increase of 517% over the previous year and an even more impressive improvement from Q3 2022, when the business posted a net loss of $182 million.
Much of this recent success can be attributed to a recently signed distribution agreement with PepsiCo, and the company believes this partnership can further accelerate its international sales. It's clear that Pepsi is driving revenue growth. In Q1, 60% of total sales were attributable to Pepsi, up from 22% in the previous quarter.
The downside to Celsius's impressive three-year performance is that the valuation has gone up right along with its stock price. Shares currently trade for 13 times sales, 119 times operating cash flow, and 134 times free cash flow. These multiples are high when taken on their own, but they're also significantly higher than their three-year average.
2. Nvidia
Chip designer Nvidia (NVDA -2.40%) is another business that has crushed the market over the past three years, with shares up 239% over that time frame. After falling dramatically from their late-2021 high, shares have returned to those lofty heights once again.
Much like Celsius, Nvidia trades at a nosebleed valuation. Its price-to-sales multiple is 36, above its three-year average of 21. The stock also trades for 173 times operating cash flow and 256 times free cash flow. Both of these multiples are also well above their average.
While Nvidia is a fine business that plays an important role in the semiconductor supply chain, its recent runup is a bit puzzling considering its Q4 2023 results, which were released in February. Revenue decreased 21% year over year and three of its segments saw a revenue decrease of more than 45%. The company’s lone bright spot was its automotive segment’s 135% revenue increase.
It’s likely that the recent momentum in the stock is due to news reports about Nvidia’s chips being used for artificial intelligence (AI) applications. Considering how much of a buzzword “AI” has become, this shouldn’t come as a surprise. Additionally, the recently reported Q1 2024 results showed an increase in data center chip sales that put some numbers behind the hype.
Nvidia has a very diversified business, with chips designed for several applications such as gaming, professional visualization, data centers, and automotive. This should insulate it a bit from the normal cyclical nature of the semiconductor sector.
That said, the prices today are absolutely absurd, and investors should wait for shares to come back to Earth before buying.
3. Cloudflare
Edge computing company Cloudflare (NET -0.23%) is another example of a company with strong performance and a price to match. The stock trades for 42 times trailing sales, compared to its three-year average of 18.
The valuation metrics relating to cash flow are even starker, with shares trading for 95 times operating cash flow and 483 times free cash flow. While these are below their three-year average, they're still very high.
Cloudflare has always been a growth company on the top line, with revenue growth consistently above 40% each quarter, although that slipped slightly in the most recent quarter to 37%. Profitability has been a slow and steady march toward positive territory. The net loss in Q1 2023 was $38 million, compared to a loss of $107 million in Q3 of 2021.
Other growth metrics are slowing, including total customers and large customers, but even at their slowing rate of growth, they're still impressive. In Q1, total customers increased by 14%, and large customers grew by 40%.
Unfortunately for prospective investors, the slowing growth has impacted the share price but has not brought the valuation down to a reasonable level. That said, Cloudflare is worth keeping an eye on for an opportunistic buy on any potential dip.
