Growth stock investors have largely been punished this year. High-priced stocks have fallen sharply as interest rates have risen and fears of a recession have swept the market.
But the pullback in growth stocks also creates a buying opportunity, and some of these stocks could deliver monster returns, especially after the valuation reset this year. Keep reading to see why it could be a genius move to add MercadoLibre (MELI 4.34%) and GitLab (GTLB -0.29%) to your portfolio today.
1. An underrated Latin American powerhouse
MercadoLibre might not be a household name in the U.S., but it's following a playbook similar to Amazon. The company started out as an e-commerce business, but has used that platform to expand into different businesses, including digital payments, logistics, and financing.
Based on volume processed, its payments platform, Mercado Pago, is now bigger than its e-commerce business. In the second quarter, the company reported $30.2 billion in total payment volume, which was up 83.9% in currency-neutral terms from the previous year, compared to 26.2% currency-neutral growth to $8.6 billion in gross merchandise volume, or the total amount of goods sold on its e-commerce platform.
As those growth rates show, MercadoLibre has bucked the trend in e-commerce stocks that has plagued American counterparts like Amazon, Etsy, and Wayfair. But that's not the only reason MercadoLibre shares could soar over the coming years.
It enjoys a number of competitive advantages and it's penetrating a massive market in Latin America with an emerging middle class. The company's four main businesses -- e-commerce, logistics (Mercado Envios), payments, and lending (Mercado Credito) -- all complement one another, creating a company that serves a broad set of needs for online sellers.
And MercadoLibre is seeing growth across the board. Its credit portfolio, for example, more than tripled in its most recent quarter to $2.7 billion, and the company's profitability has significantly improved as those businesses reach scale. In the second quarter, it posted an operating margin of 9.6%.
Its rapid growth in these businesses and a market of more than 600 million give MercadoLibre a huge growth opportunity. With the stock down more than 60% from its peak last year, now seems like a great time to buy.
2. A fast-growing SaaS play
Software-as-a-service (SaaS) stocks might have fallen out of fashion over the past year as valuations have crumbled in the sector, and GitLab (GTLB -0.29%) hasn't escaped the malaise. Shares of the company now trade well below their initial public offering price of $77, but that's no reason to write off the stock.
GitLab provides a DevOps platform, which saves programmers, IT supervisors, and other people involved in the software development process from having to use entirely different tools to get their respective jobs done. GitLab is growing rapidly, with revenue up 74% in its most recent quarter to $101 million, and it guided for 58% revenue growth in the quarter. The company is also tapping into a ripe addressable market that it values at $40 billion. GitLab faces relatively little direct competition, though Microsoft's GitHub is its closest competitor.
In an interview with The Motley Fool, GitLab chief financial officer Brian Robins said that the company faces no direct competitor in 50% of the deals it pursues, and it expects to continue grabbing market share from point solutions -- one-off software programs that handle tasks like security or design.
Like most SaaS companies, GitLab is growing through a land-and-expand strategy, adding new customers and expanding relationships with existing ones. In the second quarter, customers with more than $5,000 in annual recurring revenue increased by 61% to 5,864, and it reported a net retention rate above 130%, meaning sales from existing customers increased by at least 30%.
Lastly, there's some evidence that GitLab is delivering strong results for its customers. A study by market researcher Forrester (NASDAQ: FORR) found that the company can deliver return-on-investment of 407% within three years of deployment, showing its ability to transform an essential function for many companies. A study by Gartner also showed that the industry appears to be at a tipping point. By 2024, 60% of organizations are expected to have switched from multiple-point solutions to single-delivery platforms, up from 20% in 2021. GitLab is also seeing sales cycles shorten at a time when many software companies are seeing the opposite, a sign of increasing demand for its DevOps platform.
GitLab has the growth, the market opportunity, and the product to deliver rewarding returns to investors over the coming years. Though its valuation is still expensive at a price-to-sales ratio around 20, its potential makes it worth the risk.
