With the S&P 500 and the Nasdaq Composite Index having risen by double-digit figures in 2023, some investors might be thinking that things are starting to get a bit frothy in the market from a valuation perspective. It's not crazy to view the situation this way.
In fact, some of the best companies out there are definitely getting a little too expensive, especially after monumental share-price gains this year. Nonetheless, investors should still get familiar with these businesses should their valuations drop.
Let's take a closer look at Apple(NASDAQ: AAPL), Chipotle Mexican Grill(NYSE: CMG), and Tesla(NASDAQ: TSLA), stocks that have crushed the market in 2023.
Apple shares have climbed 45% this year, a gain that is fully attributable to its price-to-earnings (P/E) multiple expansion. Apple's stock currently trades at a P/E ratio of 31, which is significantly higher than its trailing-10-year average. Perhaps investors, worried about macroeconomic uncertainty, view the stock as a safe haven during times like now.
It's not hard to see why. From a financial perspective, you'd struggle to find a better company than this. Apple has $162 billion of cash on the balance sheet, a figure that keeps rising due to massive profits. And the business generated a net income of $97 billion last fiscal year.
However, the iPhone maker's growth prospects aren't as bright as they were just a few years ago. Revenue in each of the last four quarters has shown a year-over-year decline. And even in the current quarter, which includes the busy holiday shopping season, management expects sales to be near what they were in the same period last year.
This is still a dominant tech enterprise, but investors should wait for a lower entry point before scooping up shares.
Since the start of the year, Chipotle's stock has increased 59%. Credit goes to the company's ability to consistently exceed Wall Street expectations as they relate to EPS numbers. This was the case in each of the first three quarters of 2023.
Chipotle's growth in the past few years has been spectacular, not least because of the disruptive events that have happened, like the pandemic, inflationary pressures, and rising interest rates. In the latest quarter (the third quarter of 2023 ended Sept. 30), revenue rose 11%, with diluted earnings per share surging 23%.
Chipotle continues to flex its pricing power, too, a key indicator of a quality business.
Management expects to have 7,000 locations open in North America one day, compared to 3,321 today. The company's recent growth, coupled with these ambitious expansion targets, has certainly boosted investor enthusiasm and driven up the valuation to a P/E ratio of 52.
Even if Chipotle were to hit its growth targets faster than I think is realistically possible, the stock still looks expensive at these levels. This thriving restaurant chain should remain on investors' watch lists.
This leading electric vehicle (EV) stock has performed better than both Apple and Chipotle, as it has nearly doubled in 2023. But so has Tesla's P/E multiple. It currently sits at 77. That's a steep price to pay, especially since there are two major headwinds that this business is dealing with.
Tesla's growth is slowing. Revenue in Q3 was up just 9%, a significant deceleration from the double-digit gains that shareholders are used to seeing. Founder and CEO Elon Musk hasn't shied away from blaming higher interest rates, as they make buying cars less affordable for consumers.
And Tesla's margins are getting hammered. In an effort to remain competitive in what is becoming a crowded EV industry, while at the same time trying to maintain market share, the business has lowered the prices for its vehicles numerous times this year. The gross margin was 17.9% last quarter, and it has declined in each of the last four quarters.
Some investors might still be overly bullish on Musk and his vision of one day launching a global robotaxi service, but this is far from a certainty, rendering the valuation excessive.
10 stocks we like better than Apple
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of November 29, 2023
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Chipotle Mexican Grill, and Tesla. The Motley Fool has a disclosure policy.