Investors are increasingly worried about a recession, and those fears have caused the Nasdaq Composite to slip back into bear market territory. Currently, the growth-heavy index is down just over 20% from its high, but many individual stocks have been hit much harder. For instance, Shopify (SHOP -2.37%) and MercadoLibre (MELI -1.79%) have fallen 73% and 51%, respectively.
As a shareholder myself, I know those losses sting. But it's important to maintain a long-term mindset. Shopify and MercadoLibre are key players in the growing e-commerce industry, and both stocks look like bargains right now.
Here's what you should know.
Image source: Getty Images.
1. Shopify
Shopify makes commerce easier. Its software allows merchants to manage sales and inventory across brick-and-mortar shops and digital storefronts from a single platform. The company also provides a growing number of value-added solutions like payment processing services, marketing tools, and money management accounts. Most recently, it debuted Shopify Markets, a service that drives cross-border sales by helping merchants optimize their storefronts for international consumers.
Shopify's simplicity and broad utility have made it the most popular e-commerce software platform on the market. It now powers over 2 million businesses worldwide, up 150% from 820,000 in 2018. Not surprisingly, the company has delivered impressive financial results over that time period.
|
Metric |
2018 |
2021 |
CAGR |
|---|---|---|---|
|
Revenue |
$1.1 billion |
$4.6 billion |
63% |
|
Free cash flow |
($32 million) |
$454 million |
N/A |
Source: YCharts. CAGR = compound annual growth rate.
Going forward, shareholders have good reason to be optimistic. Shopify puts its addressable market at $160 billion, and management is executing on a strong growth strategy. That includes the build-out of a nationwide fulfillment network, the expansion of its geographic footprint, and the development of Shop, a mobile app designed to boost buyer engagement and drive repeat purchases through targeted product recommendations.
In short, Shopify is well on its way to becoming an e-commerce powerhouse, and with shares trading at 12.7 times sales, the stock is cheaper today than it has been at any point during the last five years.
2. MercadoLibre
MercadoLibre is the largest e-commerce and digital payments ecosystem in Latin America. To reinforce that edge, the company has built out an ecosystem of value-added services for shipping and fulfillment, digital advertising, and financing. Those solutions have drawn more sellers (and inventory) to its marketplace, supercharging the network effect that powers its business: More buyers means more sellers, and vice versa.
Thanks to its leadership position, MercadoLibre's marketplace take rate -- commerce revenue as a percentage of gross merchandise volume -- expanded to 16.3% in 2021, up from 9.6% in 2019. That pricing power has led to impressive financial results over the last few years.
|
Metric |
2018 |
2021 |
CAGR |
|---|---|---|---|
|
Revenue |
$1.4 billion |
$7.1 billion |
70% |
|
Free cash flow |
$133 million |
$356 million |
39% |
Source: YCharts. CAGR = compound annual growth rate.
Why is free cash flow growing more slowly than revenue? MercadoLibre is aggressively expanding its business, so capital expenditures are rising quickly. But cash from operations is up 318% over the past three years, so there is no cause for alarm. Investments in fulfillment and logistics infrastructure further strengthen MercadoLibre's competitive edge, and they should pay off down the road.
On that note, online retail sales in Latin America are expected to reach $160 billion by 2025. That puts this e-commerce company in front of a massive opportunity, and with shares trading at 6.9 times sales -- near a five-year low -- the stock looks like a bargain buy.
The fine print
The current macroeconomic environment is complicated to say the least. With inflation at a 40-year high and interest rates on the rise, stocks -- especially growth stocks like Shopify and MercadoLibre -- are likely to be volatile for the foreseeable future.
Of course, both companies have seen their share prices drop dramatically in the recent months, but they could still fall further. For that reason, investors should build positions through dollar-cost averaging. More importantly, be prepared to hold through volatility. No matter what happens over the next year or two, I think you'll be happy with the outcome a decade down the road.
