Investing legend Peter Lynch once said to look for companies that were in the second or third inning of their lives and get out by the seventh inning, a time frame that could cover decades.
He noted Walmart was a 25-year old company by the time it went public in 1970, and a decade later had grown tenfold. Lynch regretted missing out on the opportunity, only to watch the retail giant grow another 50-fold.
Here are two stocks that seem to be warming up for multiple innings of growth and could be homerun opportunities for your portfolio in 2023 and beyond.
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MercadoLibre
MercadoLibre (MELI -1.01%) is the largest e-commerce platform in Latin America and has seen tremendous growth in recent years. Revenue grew from $2.3 billion in 2019 to $7.1 billion in 2021, and surpassed that through the first nine months of 2022 with $7.5 billion in revenue. The number of unique active users grew from 74.2 million to almost 140 million.
One reason for this growth is the increasing penetration of the internet and mobile devices in the region, which has led to a surge in online shopping. Another factor is the size of the Latin American e-commerce market, which was expected to reach $379 billion last year and grow by a 25% compounded annual rate through 2025. This presents a significant opportunity for MercadoLibre to continue expanding its operations and capturing a larger share of the market.
It's been doing so by expanding into new verticals, such as its fintech arm Mercado Pago, an online payment platform that allows users to make purchases on MercadoLibre and other e-commerce websites using a variety of payment methods, including credit and debit cards, bank transfers, and cash. It has become MercadoLibre's fastest growing business.
The reason why there is still such a large runway for future growth despite the massive growth it's already seen is that e-commerce is still such an underpenetrated market in Latin America. For example, even though e-commerce grew 37% in 2020, Brazil, the largest economy in the region, only saw penetration rise from 7.5% to 12.5%, meaning there's still a vast untapped market here.
Look for MercardoLibre to have decades of growth ahead of it before it gets anywhere near the seventh-inning stretch.
Image source: Getty Images.
Zscaler
Zscaler (ZS -2.17%) is a cloud-based cybersecurity company that has seen significant growth in recent years due to the increasing demand for secure and reliable internet connectivity. One of the key drivers of this demand is the shift to remote work and the proliferation of internet-connected devices, which has led to a greater need for cybersecurity solutions. They are no longer a luxury for businesses, but a necessity.
That's reflected in Zscaler's growth, which has seen its own revenue soar 2.5 times, from $431 million in 2020 to $1.1 billion in 2022. It is still generating losses, and that's due to generous stock-based compensation, which amounted to some $430 million last year. If there's a negative critique of this company, I'd say it's there. Yet Zscaler still generates free cash flow (which excludes SBC for the calculation) of some $244 million.
The markets, though, are no longer rewarding high-growth, loss-generating businesses with high multiples, and are looking askance at companies doling out stock options. Still, Zscaler's otherwise strong financials indicate the company should eventually generate profits. It ended its fiscal first quarter with over 340 customers that have $1 million or more in annual recovering revenue with it -- a 55% increase from last year.
While Zscaler says it is seeing its sales cycle "elongating," or stretching out over longer periods, that's only a result of it closing deals that are bigger in size, so the company requires more time to scrutinize and review the contracts.
The Identity Theft Resource Center reported the number of data breaches surged 68% in 2021, while Gartner estimates global cybersecurity spending will grow to $262 billion by 2026. Overall, Zscaler appears to have a strong growth potential due to the increasing need and demand for cybersecurity solutions.
