After a brief early August rally, many stocks lost the short-term gains as September got going. Because of this backtrack, investors again have the opportunity to buy some solid stocks trading at a discount.
The companies I'm looking at purchasing all reported great second-quarter earnings, which just reinforced my confidence that these stocks will succeed. The three I'm looking at buying are Cloudflare (NET -0.23%), Snowflake (SNOW 2.53%), and MercadoLibre (MELI -1.79%). Each stock has seen a significant price dip recently and each is still trading well off its all-time highs set in 2021.
Let's take a closer look at why I'm considering a long-term investment in these three great companies.
1. Cloudflare
Hosting a website isn't cheap. There's the expensive equipment that businesses must keep in good shape, the risk of a cyber threat, and the cost of keeping an IT team around 24/7 to manage it. However, Cloudflare takes care of all those tasks for you while providing faster, safer, and the most up-to-date protocols possible.
Many companies have switched to using Cloudflare; 29% of the Fortune 1,000 are Cloudflare customers. This transition has translated to impressive revenue growth, as Cloudflare has grown its revenue by around 50% or more every quarter over the past three years.
NET Revenue (Quarterly YoY Growth) data by YCharts
That's pretty consistent and impressive growth for Cloudflare. Still, Cloudflare's $812 million in trailing-12-month revenue doesn't scratch the surface of the $135-billion market opportunity Cloudflare estimates it will serve by 2024.
One knock against Cloudflare is its profitability -- as the company bounces between making money and losing money from a free-cash-flow (FCF) standpoint quarterly. However, Cloudflare expects to sustain a positive free-cash-flow rate for the rest of the year and produce positive earnings per share (EPS) for the entire year.
Cloudflare's business is clearly on the upswing, but the stock is still richly valued at 23 times sales. On an encouraging note, this is much cheaper than the more than 100 times sales it traded at last year. The best stocks are rarely cheap, and with Cloudflare stock trading down 55% this year, I think it's a great time to buy the dip.
2. Snowflake
You may have heard it said that "data is the new oil." While that may be a bit far-fetched, the insights generated from the massive amounts of data harvested by corporations do have great value. That's why Snowflake has grown to become so popular. Its data cloud software platform allows client companies' data to be stored efficiently (even if it's unstructured). Then data scientists can utilize these massive information banks to drive business insights or power machine-learning models.
Like Cloudflare, Snowflake's second quarter (which ended July 31) was impressive. Product revenue rose 83% year over year, and its remaining performance obligations (RPO -- how much revenue Snowflake has on contracts) rose 78%. Because Snowflake recognizes revenue as its products are utilized (Snowflake isn't a subscription service, it's a pay-as-you-go model), revenue growth shows its customers are utilizing it more while RPO displays Snowflake's future business wins. With both numbers staying strong during a challenging economic period, it shows Snowflake's business strength.
Snowflake also generated an 11% FCF margin but doesn't expect to be profitable from an EPS standpoint for the year.
Similar to Cloudflare, Snowflake stock used to trade for an absurd valuation -- more than 100 times sales. Now, it can be had for 32 times sales, an expensive number but somewhat justifiable with its rapid revenue growth.
However, if Snowflake can capture a large chunk of the $248 billion cloud data platform market opportunity, the price investors are paying today will seem like nothing in the future. Snowflake is an excellent long-term investment, and the short-term weakness is an excellent opportunity to purchase the stock.
3. MercadoLibre
While the other two are tech-focused businesses, MercadoLibre is a hybrid commerce and fintech company. It provides services for e-commerce to operate in Latin America. Between its online marketplace, shipping logistics, consumer credit, and digital payment offerings, MercadoLibre's products cover practically every area necessary for e-commerce to thrive.
And when e-commerce thrives in Latin America, so will MercadoLibre.
MercadoLibre's business did exceptionally well during the pandemic, with several quarters of 100% or greater revenue growth. This success caused the stock price to soar, but investors dumped e-commerce companies due to slowing growth in the U.S., causing MercadoLibre's stock price to plummet.
However, MercadoLibre doesn't operate in the U.S., and its growth has remained rapid, even when facing tough comparisons. In Q2, revenue rose 57% year over year to $2.6 billion. Breaking it down into its two main segments, commerce grew 23% year over year to $1.4 billion while fintech blazed higher with 107% growth to $1.2 billion. While the 23% commerce growth rate isn't what it used to be, it is still a respectable number considering many consumers have reverted to their old shopping habits.
On the other hand, fintech isn't slowing its growth pace and may overtake commerce as the largest revenue segment for MercadoLibre before 2022 is up. Additionally, MercadoLibre's net income margin was 4.7% for the quarter, showing it can deliver profits.
All these factors may sound like the stock could be expensively valued due to high growth and an enormous market opportunity. But, MercadoLibre currently trades for an absurdly cheap price when measuring its price-to-sales ratio.
MELI PS Ratio data by YCharts.
With the company trading around the lowest levels since the Great Recession of 2008 and 2009, MercadoLibre is a top candidate for a stock to buy on the dip.
