Some growth stocks have not kept up with the bull run in the stock market over the last year. Some companies that experienced a surge in demand during the pandemic restrictions last year have posted slower growth this year, which has contributed to underperforming stock prices. But buying shares of leading brands when expectations are low is a good strategy to beat the average return of the market.
Wayfair (W -3.72%) and MercadoLibre (MELI -0.45%) are two leading e-commerce stocks that could be huge winners from current price levels. Here's why investors should ignore the noise and consider buying these two stocks today.
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1. Wayfair
Wayfair is a leading online home goods platform, with more than 29 million customers and $14 billion in trailing-12-month revenue. The acceleration in orders last year caused the stock to surge to over $300 a share, but tough year-over-year growth comparisons and supply shortages have pressured growth in the last few quarters, sending the stock price down 23% in the last three months. However, Wayfair is still well-positioned to capture market share as more consumers shop online in the $800 billion home goods market.
Wayfair possesses a few key advantages to accomplish its objective. It has a tailor-made website for shopping home goods, a wide selection of products, and warehouses that are designed to handle bulky items to process orders in a timely manner. These traits set Wayfair apart from larger retailers like Amazon. Revenue has more than doubled over the last three years, but recent headwinds may continue to pressure the company's growth.
During the last quarter, more consumers shifted their spending from e-commerce to entertainment and travel. Wayfair is also experiencing delays in receiving more inventory, causing the business to miss out on sales. Revenue declined 18% year over year in the third quarter due to these issues, but these are temporary problems that don't impact Wayfair's long-term growth trajectory.
The good news is that the sell-off in the stock price gives patient investors a chance to buy shares at a discount. The stock's price-to-sales ratio has dropped from over 2 to under 1.6 in the last few months, presenting a more attractive entry point.
It's also a bonus that co-founders Niraj Shah and Steve Conine own nearly 50% of the class B common stock. As shareholders who think like true business owners, Shah and Conine are not focused on short-term results but on making decisions that put Wayfair in the best position to tackle its long-term addressable market. The business has the makings of a long-term winner, but investors need to be willing to be patient as Wayfair works through the post-pandemic headwinds.
Image source: Getty Images.
2. MercadoLibre
MercadoLibre is building a one-stop-shop for e-commerce in Latin America -- one of the fastest-growing e-commerce markets. It offers mobile payments, credit, shipping, and an online marketplace with 335 million live listings at the end of the third quarter. Across all these services, it finished the last quarter with 78 million unique active users, but that is a fraction of the 635 million people who live in the region.
MercadoLibre has tremendous long-term upside. The stock price is up 637% over the last five years, but the stock has fallen sharply in recent months.
Investors are discounting the company's future profits. All the services MercadoLibre offers outside of its core marketplace business are widening the company's competitive moat and improving profitability at the same time. In the third quarter, operating margin improved to 8.6% from 7.4% in the year-ago quarter.
Margins will likely continue to move higher over the long term. Before the heavy spending on marketing and technology to support growth over the last five years, MercadoLibre generated an operating margin of about 30% a decade ago, which is more in line with U.S. counterparts like eBay and PayPal.
The stock price is down 37% over the last few months, bringing its price-to-sales ratio to the lowest level since the market crash in March 2020. This fintech stock should deliver massive returns over the long term, and the recent share price decline presents an attractive value point to get on board.
