Growth stocks have borne the brunt of the market downturn in recent months. Given a performance that saw most of their values wiped out, many investors may understandably want to stay away from such stocks.
However, upon closer examination, the long-term growth story of some of these companies remains intact, indicating some stocks could stage a comeback. And since they sell at massive discounts, it likely means they are buys, especially in the current environment. Internet and direct marketing retail stocks, such as MercadoLibre (MELI +0.41%) and Shopify (SHOP 3.33%), could become two of these comeback stories.
MercadoLibre
MercadoLibre started as a marketplace where businesses in Latin America could sell goods online. Moreover, like its e-commerce counterpart Amazon, it leveraged this enterprise to derive more growth from related businesses.
Since Latin America is a mostly cash-based and heavily unbanked society, it pioneered fintech solutions through Mercado Pago to allow for payments. It further expanded its ecosystem by offering these solutions to other businesses. Additionally, e-commerce presents logistical challenges, so it launched Mercado Envios, which can store, pack, and ship goods for its clients.
This e-commerce ecosystem has entrenched MercadoLibre in Latin America. It provides a competitive advantage even as competitors such as Sea Limited and Amazon have entered parts of this market. Investors should also note that it prospers amid inflation challenges. Brazil, which accounted for about 56% of its revenue in the first quarter of 2022, now faces double-digit annual inflation, while MercadoLibre's home country of Argentina deals with inflation that has exceeded 50% in recent years.
However, these rising prices have not slowed the company down. First-quarter 2022 revenue surged 67% to $2.2 billion from year-ago levels. This led to $65 million in quarterly income, up from a $34 million loss 12 months prior. And while it may not maintain those growth levels, analysts believe MercadoLibre can achieve 47% revenue growth for this year.
NASDAQ: MELI
Key Data Points
The decline in growth stocks has hit MercadoLibre as it has dropped by more than two-thirds from its 52-week high. Still, this takes its price-to-sales (P/S) ratio down to four.
This may not match Amazon's P/S ratio, which has fallen to around two. However, MercadoLibre's sales multiple hasn't been this cheap since the Great Recession. Given the company's potential to change the nature of e-commerce, fintech, and shipping in Latin America, MercadoLibre could present a unique opportunity for investors, businesses, and consumers in its home region.
Shopify
Shopify is a platform that allows businesses to launch their own e-commerce enterprises. Admittedly, many companies, such as Wix and Squarespace, compete in this business, at least on the software side.
However, Shopify has stood out by offering robust tools and an ecosystem that transcends the software business. Shopify Payments can accept money without third-party payment providers. Moreover, its point-of-sale system allows for inventory management, including inventory not sold through a Shopify site. Furthermore, Shopify has built a fulfillment network that can store, package, and ship a company's goods.
According to BuiltWith, Shopify has grown to a 31% market share among e-commerce platform providers in the U.S. This growth has helped it build a $39 billion market cap, exceeding that of e-commerce pioneer eBay, which supports a $24 billion market cap.
Shopify also continues to grow, with Q1 revenue coming in at $1.2 billion. This was 22% higher than year-ago levels. Admittedly, this represents a slowdown from 2021, when revenue grew by 57% year over year. Also, with operating expenses rising by 67% in Q1, the company lost $1.5 billion versus a $1.2 billion profit in Q1 2021.
However, Shopify has invested heavily in building its business and has faced some lower margins in some of its segments. Also, analysts expect 2022 revenue to recover somewhat, rising to about 27%.
NASDAQ: SHOP
Key Data Points
Additionally, since Shopify stock has dropped by more than 80% from its 52-week high, its P/S ratio has fallen to about eight. While still higher than Wix or Squarespace, which both trade at under three times sales, Shopify's sales multiple is at its lowest level in more than six years. Such a valuation, along with its rising revenue and business investments, could make Shopify one of the more compelling buys in the e-commerce space.
