A falling stock market and constant barrage of negative headlines can wear down investors. It's hard to feel any optimism. But this is precisely the time to remember that every bear market in the U.S. has been followed by a bull market. Buying high-quality businesses at today's depressed prices can lead to life-changing returns in the long run.
Two such businesses that could potentially help produce exceptional, long-term returns are MercadoLibre (MELI +1.30%) and Airbnb (ABNB +0.73%). Let's see why.
MercadoLibre: Reaching escape velocity
Defying tough macro conditions, MercadoLibre reported another outstanding result. In the third quarter of 2022, its e-commerce business saw the number of unique buyers grow by about 10%. Gross merchandise volume (GMV) -- the total monetary value of all transactions on its platform -- rose 32% in constant currency (18% in U.S. dollars), accelerating from the past quarter's jump of 26%. The company maintained strong momentum in its top three key markets of Argentina, Brazil, and Mexico, where the GMV grew 87%, 20%, and 23%, respectively.
NASDAQ: MELI
Key Data Points
While online retail across the world struggles amid a slowing global economy, MercadoLibre's thoughtful approach and proactive investments in the key pillars of e-commerce -- consumer experience, technology, a broad range of product categories, smart promotions, and its shipping and logistics network -- are making it a go-to destination for Latin American customers.
The growing efficiency of its shipping network, Mercado Envios, is shipping packages faster while incurring lower internal costs for the company. And the company's advertising business, although in its early stages, is growing at a fast pace. Ad revenue grew from 0.9% of the GMV a year ago to 1.3% in the recently reported quarter.
Image source: Getty Images.
The performance of MercadoLibre's fintech business MercadoPago -- an expanding one-stop-shop for financial services -- was even more impressive. More and more sellers and buyers on MercadoLibre's e-commerce platform, as well as dedicated MercadoPago users, are taking advantage of the credit facilities and personal loans offered by the company.
MercadoPago's asset management and savings features are also becoming popular. A record 40 million unique customers used MercadoPago's services in the third quarter. MercadoPago has now added 10 million users over the past 12 months. The total payment volume processed by MercadoPago in the third quarter grew by an incredible 76% in constant currency (54% in U.S. dollars) reaching $32 billion.
Collectively, the e-commerce and fintech businesses make the customer's relationship with MercadoLibre very sticky, and the symbiotic relationship between the two lines of businesses is driving the results. Revenue for the third quarter went up 61% in constant currency, reaching $2.7 billion. Recording that impressive growth on top of the explosive growth of 73% a year ago is quite remarkable. There was also good news on the profitability front as the company improved operational efficiency -- gross margin went up to 50.1% from 43.4% a year ago and operating margin jumped to 11% from 8.6%.
MercadoLibre is reaching a size and scale that make it very difficult for its rivals to compete. With its growing ecosystem of products and deepening customer relationships, the company resiliently keeps stacking great results quarter after quarter. And despite that, the stock is trading close to its 10-year low value of 4.8 on a price-to-sales basis. Buying shares now will likely make investors very happy in the next five years.
Airbnb: A cash-rich business model
Airbnb operates a marketplace where travelers can choose a place to stay from an unmatched variety of accommodations and price points. The company has become a household name, and has also provided a source of income to over 4 million hosts (households renting their homes to travelers) across the globe.
NASDAQ: ABNB
Key Data Points
Although on the surface Airbnb may seem like a travel or lodging company, its business model is fundamentally different from traditional hotels and resorts in that it doesn't own, lease, maintain, or operate the properties available on its platform. That significantly reduces the upfront and ongoing capital expenditures and operating expenses for the company.
Also, with its streamlined technology platform, the incremental cost and time of adding a new listing or serving a new traveler for Airbnb are almost negligible. In other words, growth for Airbnb comes at a significantly cheaper cost and faster pace relative to traditional hotels that rely on hard assets. And as more travelers use Airbnb, more hosts want to join the platform, creating a natural network effect.
Despite a tough economic climate, consumers' thirst for travel didn't seem to wane in the third quarter of 2022 as total nights and experiences booked for the quarter reached almost 100 million, growing 25% from a year ago. The average daily rate for stays rose as well, jumping 5% to $155. With such high demand for Airbnb's services, the recent quarter turned out to be the company's biggest quarter as revenue reached $2.9 billion, growing 29% year over year.
With its efficient business model, Airbnb grew its year-over-year net income 46% to $1.2 billion and free cash flow 80% to $960 million. Over the past 12 months, the company has generated an astounding $3.3 billion in free cash flow at a margin of 40% -- meaning, for $1 of revenue earned the company is producing $0.40 in free cash flow. While Airbnb is still a young public company, it is showing all signs of becoming a cash flow machine.
Despite a consistent performance, Airbnb's shares are trading close to their 10-year lows on metrics including price-to-sales (9.1), price-to-earnings (56), and price-to-free cash flow (43.3). While shares may seem slightly expensive, Airbnb's global brand, scalable business model, network effects, and future opportunity justify the premium the market is demanding. Taking a small position in Airbnb today will likely pay handsome rewards in the long run.
