The recent market sell-off has been ugly for a few companies in particular. Despite making huge gains in market share and capabilities throughout 2020 and 2021, these stocks have been sold off as if they will never grow again. Even Wall Street analysts who have historically discounted growth stocks have huge upside projected for the two businesses I am talking about.
Shopify's (SHOP 1.11%) average price target is $1,029, representing 52% upside from the Feb. 25 price at market close, and MercadoLibre's (MELI 3.09%) is $1,583, representing 42% potential from market close on that day. Both companies are involved with e-commerce, which captured significant market share during the early part of the pandemic. Additionally, Shopify and MercadoLibre are down 63% and 53% from their all-time highs, respectively, as I write this. These stocks are primed for an incredible rise.
Image source: Getty Images.
Shopify
Large and small businesses power their e-commerce businesses with Shopify's platform. Shopify offers its services for as little as $29 per month to up to $2,000 or more per month for large brands demanding the most powerful tools. E-commerce represents a huge opportunity, which Shopify pegs at $160 billion. Shopify already has a large market share, with Shopify stores making up an estimated 10.3% of U.S. e-commerce sales during 2021.
Shopify splits its business into two segments: merchant solutions and subscription solutions. Subscription solutions are the monthly fees businesses pay to be on the Shopify platform. During the fourth quarter, this segment brought in $351 million, up 26% from the previous year. Additionally, its monthly recurring revenue passed $100 million for the first time, ringing in at $102 million.
Merchant solutions make up a larger portion of Shopify's revenue. The segment exceeded $1 billion in quarterly revenue for the first time in the most recent quarter, with revenue up 47% year over year (YOY). It makes this money by taking a portion of all sales processed on its website and through its payment platforms. This number goes up as gross merchandise volume (GMV) goes up. GMV was up 31% YOY to $54.1 billion during the quarter.
Despite a fantastic quarter, investors zoomed in on management's comments about the outlook for 2022. In the earnings release, the company said: "Our financial outlook anticipates revenue growth for the full year 2022 that is lower than the 57% revenue growth achieved in 2021, but still rapid and outpacing the growth of e-commerce." The market freaked out this predicted slowdown, even though it indicated growth would still be rapid. Two days after the company reported earnings, the stock had sold off 25%. I believe this could be a fantastic buying opportunity, as its growth will still be noteworthy.
MercadoLibre
MercadoLibre brings many e-commerce aspects, like digital payments, shipping solutions, and an online platform, to Latin American countries. It has been successful in rolling out its ecosystem to 18 countries in Central and South America.
Overall, MercadoLibre's Q4 revenue grew 73.9% YOY on a currency-neutral (FX) basis to $2.1 billion; its full-year sales were up 78% to $7.1 billion. Digging into each segment reveals strength across the board. Its shipping division, Mercado Envios, shipped 276 million items during the quarter, a 29% YOY increase. The payment volume on its Mercado Pago platform was up an FX 72.8% over last year's quarter.
MercadoLibre's marketplace division had tough comparisons, as COVID-19 provided an online sales boost in 2020. Still, GMV rose 32% YOY to $8 billion in the quarter, and it sold 26% more items as well. Because MercadoLibre sells goods, its margins aren't as high as other companies. However, its full-year gross margin increased from 36.8% in 2020 to 40% in 2021.
Management's policy is to not give guidance, but MercadoLibre shows no signs of slowing down.
With the Federal Reserve likely raising interest rates multiple times this year, many investors are worried about stock valuations. However, with the beat-down many companies have taken, they are already priced in a range that looks historically enticing.
Shopify is well below where it was during most of 2019 and is nearing the 15 P/S range it traded around prior to 2019. MercadoLibre, with a P/S under 10, is trading at a valuation it has rarely reached over the last 10 years. Dropping below a P/S of 10 doesn't often happen for MercadoLibre, and investors should take notice.
Both stocks are priced well below normal, and while the sell-off may continue, it is likely only a matter of time before fortunes change and investors recognize the strength of the businesses. The next few months could be difficult, but holding on to the stocks will likely set investors up for big returns. Investors should take advantage of the prices now for maximum future upside potential.
