Many investors have lost their taste for richly valued equities. With inflation at a 40-year high and three or four interest rate hikes on the horizon, consumer spending is likely to grow more slowly (or even decline) in the near term. And that, in turn, will have a negative impact on corporate revenue and profits. So traders have pulled money out of the market, especially where high-growth tech stocks are concerned.
Fortunately, that domino effect has created a buying opportunity for long-term investors. High-quality businesses like Shopify (SHOP 2.34%) and MercadoLibre (MELI 0.27%) currently trade a cheaper valuations than they have in years. Yet, global e-commerce sales are expected to grow at an annualized rate of 10.7% to reach $7.4 trillion by 2025, meaning both companies have plenty of room to grow.
Here's what you should know.
Shopify's software helps merchants manage their businesses across physical and digital locations, creating a single interface that links sales from websites, online marketplaces, social media networks, and brick-and-mortar stores. Additionally, the company provides tools for financing, payment processing, and shipping, making its platform a comprehensive solution for the modern entrepreneur.
Fueled by that simplicity, Shopify has become the retail operating system for over 2 million merchants, and while a the vast majority of those are small- and medium-sized businesses, the company is also moving upmarket. Over 14,000 clients now rely on Shopify Plus, a software platform tailored to the needs of larger enterprises. That includes brands like Figs and Netflix.
In 2021, Shopify ranked as the second-largest player in the U.S. e-commerce industry, holding 10.3% market share. That figure is actually up from 8.6% in 2020, meaning Shopify is growing far more quickly than the broader e-commerce industry. Not surprisingly, that has translated into impressive financial results. Over the past year, revenue rose 57% to $4.6 billion, GAAP operating margin expanded to 6%, up from 3% in the prior year, and free cash flow jumped 18% to $454 million.
Looking ahead, the company puts its addressable market at $160 billion, and the founder-led management team has consistently executed on a robust growth strategy. In 2021, Shopify launched its new point-of-sale hardware to retailers in several European countries, building out its international presence. The company also debuted tools for cross-border commerce, money management, and buy now, pay later. Better yet, Shopify continued to build out its burgeoning fulfillment network that, once complete, will lean on collaborative robots and artificial intelligence to help merchants ship packages more quickly and cost effectively.
Shopify currently trades at 18 times sales. While that's not necessarily cheap, high-quality businesses rarely look cheap by traditional measures. Even so, the stock is cheaper today than it has been since April 2019, and its current valuation is well below the five-year average of 31 times sales. That's why this growth stock looks like a bargain right now.
MercadoLibre is often called the "Amazon of Latin America." That comparison isn't a perfect fit, but it does convey the company's dominance in the Latin American e-commerce industry. MercadoLibre holds over 30% market share, and its marketplace receives roughly 668 million monthly visitors, nearly four times more than the next closest competitor.
The company's success can be attributed to its robust ecosystem of products and services. For instance, Mercado Pago is a fintech platform that democratizes digital payments, making it possible for merchants to transact online in a region where relatively few people have access to a bank account or debit card. MercadoLibre also offers logistics solutions like discounted shipping and managed fulfillment. That makes life easier for merchants, but it also improves the experience for buyers by ensuring a fast and reliable delivery.
Not surprisingly, the company consistently delivers impressive financial results. Over the past year, revenue skyrocketed 89% to $6.3 billion, and MercadoLibre posted a GAAP profit of $1.59 per diluted share, up from a loss of $0.16 per diluted share in the prior year. Better yet, MercadoLibre's take rate -- sales as a percentage of payment volume -- improved in both its e-commerce and fintech businesses, evidencing the company's pricing power. And it still has plenty of room to grow.
In 2021, Latin American e-commerce sales totaled $131 billion, according to eMarketer. But less than 40% of the Latin American population currently shops online, due in part to relatively low internet penetration. As that figure rises in the years ahead, e-commerce sales and digital payments volume should follow. And as the market leader in both cases, MercadoLibre stands to benefit greatly.
Currently, the stock trades at 7.4 times sales -- its cheapest valuation in five years, and well below its 10-year average of 11.9 times sales. At that price, this growth stock is a screaming buy.