Since the beginning of the pandemic, the Federal Reserve and Congress have collectively injected nearly $9 trillion into the U.S. economy through quantitative easing (i.e. the purchase of government-backed bonds from the open market) and stimulus payments. In both cases, these measures were meant to prevent a prolonged recession and boost consumer spending.

In hindsight, some investors are wondering if that was too much stimulus. A massive increase in the cash supply, especially in the context of slow economic growth, is a key driver of inflation. In fact, earlier this month, the Labor Department said the Consumer Price Index -- a proxy for inflation -- jumped 5.4% over the last 12 months. And now that global supply chains are in disarray, will things get worse?

No one knows the answer to that question for sure. But that doesn't mean you can't find good investments. Businesses that make money by processing payments tend to be somewhat resistant to inflation, because rising prices should actually boost revenue. Building on that idea, MercadoLibre (NASDAQ:MELI) and Square (NYSE:SQ) look like smart buys right now. Here's what you should know.

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Image source: Getty Images.

1. MercadoLibre

E-commerce and digital payments are two of the most pervasive trends in the world, and MercadoLibre's business capitalizes on both. In fact, with 140 million active users in 2020, MercadoLibre is the largest online commerce and payments ecosystem in Latin America, which itself is one of the fastest-growing economies in the world.

In recent years, the company has taken steps to reinforce that advantage. For instance, its fintech platform (Mercado Pago) is now available off-marketplace, meaning consumers can use the digital wallet both on and off MercadoLibre, in both the physical and digital worlds. In hindsight, that move was brilliant, as it democratized financial services in a region where relatively few consumers have access to bank accounts and debit cards.

Likewise, MercadoLibre provides advertising, financing, and logistics services to its sellers, making its platform an end-to-end solution for modern commerce. To use a technical term, this business model creates high switching costs. In other words, sellers would be hard-pressed to find a solution that provides the same level of convenience. And even if they did, switching to a new platform would be time consuming and costly.

That advantage has translated into strong growth for MercadoLibre.

Metric

Q2 2018 (TTM)

Q2 2021 (TTM)

CAGR

Revenue

$1.3 billion

$5.5 billion

61%

Free cash flow

$62.8 million

$182.4 million

43%

Source: Ycharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

Last year, e-commerce sales grew more quickly in Latin America than in any other region of the world, according to eMarketer. And that trend is set to continue in 2021, as MercadoLibre's three core geographies -- Argentina, Brazil, and Mexico -- are all expected to rank among the five fastest-growing markets worldwide. That's why now looks like a good time to add this growth stock to your portfolio.

2. Square

Square has long been a disruptive force in the finance industry. Its Seller ecosystem improves upon the disjointed solutions traditionally offered by banks, providing merchants with a self-service, comprehensive commerce platform, inclusive of all the hardware, software, and services needed to manage a business.

Square's Cash App ecosystem takes a similarly disruptive approach to consumer finance, allowing users to deposit, send, spend, and invest money (and file taxes) from a single platform. Moreover, its digital-first strategy gives it a significant edge over banks with physical locations. In 2020, the company spent less than $5 to acquire each Cash App user, whereas banks typically spend $1,500 to acquire each client. That means Square can cost-effectively serve consumers that would be unprofitable for traditional banks.

Not surprisingly, the company is growing at a phenomenal pace.

Metric

Q2 2018 (TTM)

Q2 2021 (TTM)

CAGR

Gross profit

$1.0 billion

$3.7 billion

53%

Free cash flow

$71.2 million

$682.8 million

112%

Source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

Going forward, Square is well positioned to maintain that momentum. E-commerce and digital payments should continue to gain traction in the coming years, and management puts its addressable market at $160 billion. And Square has several irons in the fire that should help it capitalize on that opportunity.

Most notably, the company is expanding beyond its five core geographies (the U.S., U.K., Canada, Japan, and Australia). Specifically, Square recently debuted its Seller platform in France, and opened early access to merchants in Ireland and Spain. It also launched new hardware and software in Canada. For all of these reasons, this stock looks like a smart buy right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.