Buying shares of growing companies and holding them for many years is one of the simplest paths to growing your wealth. If, for example, you invest $1,000 a month in a portfolio of stocks that grows at an annualized rate of 15% for 30 years, at the end of that time, it will be worth $6.9 million. The earlier you start investing, the longer the power of compound growth has to act on your assets, and the more you'll have later.
Two companies that can deliver returns like that are the fast-growing e-commerce and digital payments leader MercadoLibre (MELI -0.45%) and Chinese tech giant Tencent Holdings (TCEHY -0.94%). Here's why these growth stocks are great buys right now.
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1. MercadoLibre
The growth of global e-commerce is a megatrend worth investing in, and there are some good options in the domestic market -- PayPal Holdings, Block, and Shopify, among others. But if you look to Latin America, you'll find that one company dominates the e-commerce market in a region with twice the population of the United States.
MercadoLibre is sort of like eBay and PayPal rolled into one, except it's growing much faster. It operates a marketplace business (Mercado Libre), offers logistics services to sellers (Mercado Envios), loans to merchants (Mercado Credito), and a fast-growing digital payments business (Mercado Pago). Revenue grew 74% year over year in the fourth quarter, which was a deceleration from the triple-digit percentages it achieved in 2020, but the company has a lot more room to grow.
The Mercado Pago payments business continues to see momentum at physical retail locations as it becomes a viable in-person payment alternative. So far, the service only has 28 million users in Brazil and has a huge growth opportunity. And recently, MercadoLibre began offering a cryptocurrency trading tool, hoping to fuel more engagement with the app.
On the fourth-quarter earnings call, management expressed optimism about the opportunities ahead. "Even with the reopening of physical stores, customers in Latin America have embraced shopping online, paving the way for further long-term growth in the region," said CFO Pedro Arnt.
The market's recent tech sector and growth stock sell-off has given investors a chance to buy MercadoLibre at its cheapest valuation in a decade -- a price-to-sales (P/S) ratio of 8.5. That's down from a P/S of over 20 a year ago. From today's level, it has room for many years of strong growth.
2. Tencent
Many investors have been fleeing from Chinese tech stocks recently, in part due to the actions of both Chinese and U.S. regulators. In accordance with the Holding Foreign Companies Accountable Act, passed in 2020, the Securities and Exchange Commission has been warning that it will delist Chinese stocks from U.S. exchanges if they don't comply with U.S. regulations regarding corporate audits. And Chinese regulators have been cracking down on their domestic tech giants for some time. These factors and others have combined to create an atmosphere of confusion and uncertainty that has brought valuations for Chinese tech stocks down to bargain territory.
Tencent, an internet, tech, and entertainment giant, has grown its revenues at a 33% compound annual rate over the last five years, but the stock trades at a modest price-to-earnings ratio of 17. However, according to reports, China and the U.S. are progressing toward a resolution of the issues that triggered the delisting threats. China also has signaled that it's preparing to end its intense regulatory crackdown. Tencent's stock price shot up 28% after investors heard that macro news earlier this month and began to pay more attention to how cheap the stock had gotten.
Tencent should be able to deliver many years of compound growth once the dust settles. It's the largest social media operator in China, with over 1.2 billion monthly active users. It's also entrenched throughout that nation's tech sector, with businesses across cloud services, fintech, and online advertising. And it's the largest video game company in the world by revenue.
In China, the threat of intensified government regulation will always loom over companies, but the market has done a good job of handicapping that risk here -- Tencent shares generally trade at a much lower valuation than its growth rates would suggest they should. At today's cheap price levels, a small starter investment in Tencent might be a worthwhile addition to your portfolio.
