Wall Street is worried about inflation, which hit a 40-year-high in December, as well as the impact of rising interest rates on corporate profits. As a result, many investors have pulled money out of stocks, and the tech-heavy Nasdaq Composite has dropped 12% from its all-time high. But growth stocks like Roku (ROKU 0.74%) and MercadoLibre(MELI -1.87%) have been hit even harder, plunging 67% and 47%, respectively.
However, those undiscerning sell-offs are usually a reaction to short-term headwinds, and because some 80% of U.S. equities are traded algorithmically (i.e. automatically by machines using mathematical models), a small sell-off can easily snowball into an avalanche. For that reason, now looks like a good time to pick up a few shares of Roku and MercadoLibre, both of which have built strong businesses in quickly growing industries.
Here's what you should know.
Image source: Getty Images.
1. Roku
Roku has become the gateway to streaming entertainment. The company's operating system (Roku OS) is the only platform purpose-built for connected TV (CTV), while rival products like Amazon's Fire OS and Samsung's Tizen OS were originally designed for mobile devices. Roku's management believes its products make for a better viewing experience, and the company has parlayed that edge into a serious competitive advantage.
In 2021, Roku held a 32% market share in terms of total streaming time -- that's more than the next two competitors combined, which happened to be Amazon and Samsung. Of course, user engagement is gold to advertisers, so Roku captured 45% of programmatic CTV ad spending through the first half of the year, more than the next eight competitors combined.
Not surprisingly, the company's financial performance has been solid. In the third quarter, active accounts jumped 23% to 56.4 million, revenue soared 51% to $680 million, and Roku posted a GAAP profit of $0.48 per diluted share, up from $0.09 per diluted share in the prior year.
Going forward, Roku's growth strategy centers on adding original content to its own ad-supported streaming service, The Roku Channel. The company debuted over 50 original titles last year, including its first feature-length film, and the response from viewers was overwhelmingly positive. In fact, streaming hours on The Roku Channel more than doubled in the most recent quarter, and it ranked as one of the top five channels on the platform.
In short, Roku has established itself as a key player in the streaming industry, and the company is executing on a strong growth strategy. That should help Roku capitalize on its massive opportunity in online video advertising, a market set to hit $120 billion by 2024, according to Omdia. That's why this growth stock could make you richer in the long run.
2. MercadoLibre
MercadoLibre operates across 18 countries in Latin America, and it has become the largest e-commerce and digital payments ecosystem in the region. In fact, its marketplace averages 667 million visitors each month, nearly four times more than the next closest competitor. And its fintech platform, Mercado Pago, reinforces that advantage by democratizing digital payments in a region where relatively few people have bank accounts or debit cards.
MercadoLibre also provides a range of value-added products, including shipping and fulfillment services through Mercado Envíos, and access to financing through Mercado Crédito. Not surprisingly, those products are gaining traction with merchants. In the third quarter, 97% of items were shipped through Mercado Envíos, up from 92% in the prior year, and Mercado Crédito's credit portfolio grew 529% to $1.1 billion.
Those products make MercadoLibre's platform very sticky. Put another way, the more a merchant relies on the company, the harder it is to cut ties and switch platforms. And that has fueled an impressive financial performance. In the most recent quarter, MercadoLibre's take rate -- revenue divided by payment volume -- rose on both its marketplace and fintech platform, driving $1.9 billion in sales, up 73%. And the company posted a GAAP profit of $1.92 per diluted share, up from $0.28 per diluted share in the prior year.
Going forward, shareholders have good reason to believe MercadoLibre could maintain that momentum. Online shopping and digital payments will only become more popular in the future, and the network effects that power MercadoLibre's business -- more buyers bring more sellers, and more sellers bring more buyers -- should help the company maintain its dominance.
Additionally, the stock currently trades at 8.2 times sales, well below its five-year average of 13.9 times sales. In fact, MercadoLibre's stock is cheaper right now (on a relative basis) than it has been since 2016, when it traded for 5.8 times sales. That's why this growth stock is a screaming buy right now.
