If you've been keeping an eye on the investing world, you've probably noticed that the market has been down on growth stocks lately. Your own portfolio might even be feeling the squeeze.
With inflation at the highest level it's been in decades, the Fed gearing up to raise interest rates, and the economic outlook clouded by pandemic-fueled uncertainty, multiple factors spell trouble for growth stocks. But here's the silver lining: There are companies with incredible long-term potential that are now a lot cheaper amid market turbulence. Let's take a look at two hypergrowth stocks that are worth investing in right now.
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1. Cloudflare
When it comes to keeping web applications up and running smoothly, Cloudflare (NET 1.44%) is one of the most important companies in the world. The tech leader provides content-delivery-network (CDN) and domain-name-server (DNS) services, protection against distributed denial of service (DDoS) attacks, and a variety of other cloud-based services that help keep internet communications fast and efficient.
The business' momentum has been phenomenal, with sales increasing at a 50% compound annual growth rate (CAGR) from 2016 through 2020. And performance has been more impressive in 2021's reported quarters.
Sales jumped 51% year over year in the third quarter, and the company increased its large-customer count (those billed over $100,000 per year) by 71%. The business also posted a very impressive 78.3% gross margin in the period.
Because the number of web applications and connected devices accessing them continue are rapidly increasing, there's very favorable long-term demand for Cloudflare's services. More than ever, web applications are essential to business' success, and they'll only become more so.
Cloudflare recently published a report stating that ransom DDoS attacks experienced a massive increase in the fourth quarter, and it's not just technology and web-focused businesses that are getting hit. The company reported that the manufacturing industry saw more DDoS attacks than any other in the period, for which earnings will be reported on Feb. 10.
Despite Cloudflare's very strong performance and a favorable demand outlook, its valuation has gotten hammered as the market has moved away from cloud-software companies. The stock is down roughly 62% from its high, and the company now has a market capitalization of roughly $28.5 billion. While its forward price-to-sales multiple of roughly 29 times might be intimidating at first glance, the business' rapidly expanding sales and fantastic margins point to big profit potential and that Cloudfare is equipped with a a stellar long-term growth engine.
2. MercadoLibre
MercadoLibre (MELI 3.09%) stands out as a top stock for benefiting from two massive trends in the Latin American market: e-commerce and fintech services. Economic and political instability are currently driving bearish sentiment on many Latin American stocks, but the region still has an intriguing long-term outlook, and MercadoLibre is poised for success.
Inflation in many Latin American countries is running high, with Citigroup estimating an overall inflation rate of 10.6% in 2021 and Brazil and Argentina posting inflation of 10.7% and 52%, respectively. Economists polled by Bloomberg estimate that inflation in the region will come in at roughly 10.4% this year, and rising prices combined with lingering challenges related to the coronavirus pandemic have added to political tensions and division.
Despite the unfavorable macroeconomic backdrop and increased caution from investors, MercadoLibre has continued to put up strong results. Its core e-commerce and fintech services segments increased sales 69% and 61.7%, respectively, year over year. Overall revenue climbed 66.5% year over year last quarter, and operating income in the period jumped 93% to reach $160.4 million.
MercadoLibre stock is now down about 48% from the high that it hit last January. It has a market capitalization of roughly $52 billion and trades at 5.5 times this year's expected sales and 122 times expected earnings. That valuation admittedly bakes in strong performance in coming years, but the good news is that the market opportunity for e-commerce and fintech services in Latin America is massive.
The region's retail e-commerce market alone is projected to grow from $85 billion in sales in 2021 to $160 billion in sales by 2025 according to a report from Statista, and Boston Consulting Group estimates that payments revenues will have increased at a compound annual growth rate of 8.3% from 2020 to 2025. These two service industries are still at much earlier growth stages compared to where they're at in the U.S., Western Europe, and China, and MercadoLibre is in position to be a huge winner as they evolve.
