It is easy to dismiss companies that trade on high price to earnings (PE) ratios as one would automatically assume their shares are too expensive to buy. Yet businesses often command high PEs because of fast revenue growth. One perfect example is online food takeaway portal Just Eat (JE.) whose forward PE ratio could be slashed by more than half over the next two years if earnings forecasts are correct.

Investment bank Jefferies forecasts 3.8p underlying earnings per share for 2014, rising to 5.4p in 2015 and 7.8p in 2016. At 303p (at the time of writing), it trades on a prospective 79.7 times earnings for the current year, falling to 38.8 in 2016. While the latter figure is clearly still high, it does illustrate how ratings can quickly come down if earnings rally.

And that’s the predicament for investors in Just Eat. You have to believe that the earnings growth is sustainable. If you are bullish, then the stock actually looks cheap on a different valuation metric, being PEG (price to earnings to growth). A ratio below 1.0 implies a stock is cheap against its growth profile; Just Eat trades on PEG of 0.36 for 2014 and 0.87 for 2016.

Jefferies classifies high growth as sustained forward revenue growth in excess of 25%, with Just Eat ticking that box. The bank says (enterprise value) EV/Sales tends to be perceived as the most relevant valuation metric for such companies, from a capital markets perspective. But it also says EV/EBITDA (earning before interest, tax, depreciation and amortisation) can be relevant: Just Eat turns in a 39.7 ratio for 2014 and 17.4 for 2016.

Tasty proposition

We see clear rewards and risks with Just Eat. The ability to let consumers order takeaway food via their tablet device, smartphone or laptop provides welcome convenience. Just Eat takes 12% commission on orders and provides the systems so your local curry house or kebab shop can receive an order and the payment. Where customers pay for an order via a debit or credit card, rather than cash upon delivery, Just East releases the funds to restaurants on a monthly basis, so it benefits from parking that cash which helps working capital requirements.

It is also chasing ancillary revenues where it provides services to clients including menu printing and online marketing - fundamentally extending its economies of scale to small businesses that wouldn’t normally have such benefits.

The next stage in Just Eat’s evolution will be taking orders for restaurants that don’t have delivery capability. This plays into the ‘click and collect’ concept that is taking the retail market by storm. You order what you want and go to store and pick it up. Jefferies reckons the opportunity is significant. It says 52% of takeaway restaurants only offer in-store collection to consumers in the UK. That’s 50,000 extra restaurants that could be added to Just Eat’s systems.

This is not just a UK story. Just East has a presence in 13 countries. Yet the downside to Just Eat’s business model is that it can be copied very easily so this is a race to get an established footprint globally and as many as restaurants signed up as possible. There’s already clear competition including Hungry Horse, Delivery Hero and Takeaway.com for Just Eat. Finally, we are mindful of how highly-rated companies can see significant share price corrections either at the slightest bit of bad news or the start of a downward trend in the broader stock market.

Jefferies has a 450p price target which implies 49% upside from the current price. We acknowledge the rating is high but firmly believe it is tapping a hot part of the market, so we share the bank’s bullish view on a short-term basis.