Many tech investors undoubtedly feel discouraged by the current bear market. With many growth names down more than 80%, any comeback seems far away.
However, the market recovered from every previous bear market and will likely recover from the current one. This means investors should think ahead to growth tech stocks that could lead a recovery. While numerous stocks could ultimately accomplish that task, two that have positioned themselves for such leadership are MercadoLibre (MELI -3.17%) and Twilio (TWLO 1.14%).
MercadoLibre is a growth leader because it mastered the art of fostering new business segments and growth from its challenges. It pioneered e-commerce in Latin America beginning in 1999.
However, it faced the challenge of selling online in cash-based societies. To this end, it created MercadoPago to help consumers buy on MercadoLibre's site. However, its popularity made it a sort of PayPal of Latin America as the company made it available for generalized fintech purposes.
The company faced another challenge in shipping its goods, a difficulty that likely played a role in the establishment of Mercado Envios. This segment packages and delivers goods for clients, much like Amazon or Shopify. MercadoLibre also leveraged its e-commerce presence to sell ads, one that should serve it well if Amazon's advertising success is any indication.
Despite economic slowdowns and high inflation, its $4.8 billion in revenue in the first half of the year rose 57% versus the same period in 2021. Net income in the first two quarters of the year was $188 million. This is up from $34 million over the same time frame as the company limited growth in the cost of revenue.
Despite that success, it is not too late to buy MercadoLibre stock. Investors hammered MercadoLibre along with other growth tech stocks, and it is down 50% from its high. Its price-to-sales (P/S) ratio of 5 is higher than the Sea Limited sales multiple of 3. But MercadoLibre has sidestepped many of its peer's growth struggles, a factor that should position it to return to growth faster once conditions improve.
Admittedly, few might see Twilio capable of powering a bull-market run at this stage. Its stock sells at more than an 80% discount to its early 2021 high of $457 per share. Moreover, the company just announced plans to lay off 11% of its workforce. Continuing losses and a perceived lack of a competitive moat may also weigh against investor sentiment.
Despite such perceptions, it deserves a closer look. Twilio is a communications platform-as-a-service (CPaaS) provider, providing the APIs that accommodate text, voice, video, and email communications on one platform.
Its first-mover status helped it land clients like Uber, DoorDash, and Airbnb. Since switching providers could mean an extended outage for such critical services, it is unlikely they will turn to a competitor.
Additionally, products such as Flex and Segment allow easier customer contacts and data portability, giving Twilio a competitive advantage. These offerings, along with the forecasted industry growth, could serve as a tailwind for Twilio. Future Market Insights predicts a compound annual growth rate for CPaaS of 25% through 2032, making it a $59 billion market by that year.
Twilio only claims a small part of that market now. In the first half of 2022, its $1.8 billion in revenue surged higher by 44%. That is somewhat slower than the 61% growth in 2021 or the 55% increase in 2020. Also, rapid growth in expenses, especially its cost of revenue, meant losses for the first two quarters rose to $544 million, up from $434 million in the first half of 2021.
Nonetheless, considering that Twilio sells for just four times sales, investors might find it easier to forgive the sales slowdown. In February 2021, new buyers paid up to 36 times sales. That is nine times higher than today, likely indicating that sellers overreacted to a modestly lower revenue growth rate.
Twilio may seem uncertain as losses mount and it restructures amid layoffs. But once growth recovers, it is likely more companies will turn to its CPaaS products, meaning that now could be the time to buy Twilio stock.