Is the Guzman Y Gomez share price valuation too spicy in 2024? Here's a top broker's view

Is the valuation too spicy or is it a top buy?

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I young woman takes a bite out of a burrito n the street outside a Mexican fast-food establishment.

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The Guzman Y Gomez Ltd (ASX: GYG) share price has climbed an impressive 19.8% in the last month alone. Currently trading at $44.07, it has more than doubled since the company was listed in June this year.

This rapid share price increase may have some investors wondering whether now is the right time to buy or if the Mexican food stock is overpriced.

The market has been loving ASX growth shares with exciting international expansion potential this year. Names like WiseTech Global Ltd (ASX: WTC), Pro Medicus Ltd (ASX: PME), and TechnologyOne Ltd (ASX: TNE) are all up at least 70% in 2024 to date.

Guzman Y Gomez is not exactly a tech or healthcare business, though its food is proving to be popular across Australia. However, the value of its food and the value of Guzman Y Gomez shares are two separate things.

One leading broker has this to say on whether the Mexican food business is good value or not.

Bell Potter's rating on the Guzman Y Gomez share price

According to reporting by The Australian, Richard Coppleson from Bell Potter now rates GYG shares as a sell following the significant boost in market capitalisation since its initial public offering (IPO) in the middle of the year.

Coppleson thinks that the increase in the Guzman Y Gomez share price in the last few months is largely due to its inclusion in the S&P/ASX 200 Index (ASX: XJO) and the MSCI Australian Mid-Cap Index.

The broker believes GYG shares could reverse these gains and see a sell-off as early as this month:

Now as soon as this buying has been exhausted – given the view of the stock from all the brokers, the excessive rally and the astronomical – sky high – PE (in fact I've very rarely seen one that high) – there is a very high chance that this suffers a big selloff (PE de-rating) in December.

Don't forget the escrowed shares

According to Bell Potter, another factor that could cause a decline in the Guzman Y Gomez share price is the impending release of GYG shares from escrow. In escrow, a certain number of shares are locked up and can't be sold until the escrow is finished.

According to The Australian, a quarter of the escrowed shares will exit escrow once the Mexican food business has released its FY25 first-half result for the six months to 31 December 2024 if the average GYG share price for any 10 consecutive trading days after the result exceeds the IPO offer price (of $22) by at least 20%.

Considering the Guzman Y Gomez share price is trading at double the IPO price, it certainly passes that hurdle.

Of course, just because shareholders can sell shares doesn't mean they will. However, more shares could benefit the market by providing more liquidity and enabling interested investors to acquire shares more easily.

Guzman Y Gomez share price snapshot

Since GYG shares' opening trading day in June, when they started at $22 and closed at $30, they have risen a further 47%, as shown in the chart below.

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Motley Fool contributor Tristan Harrison has positions in Guzman Y Gomez. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Technology One and WiseTech Global. The Motley Fool Australia has positions in and has recommended WiseTech Global. The Motley Fool Australia has recommended Technology One. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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