Let's talk about the 800-pound bear in the room. Nearly 14 months after the decline began, the Nasdaq Composite remains caught in bear market territory, down 31% from its peak reached in late 2021. Investors are looking for a light at the end of the tunnel -- and hoping it isn't a train.
Here's the good news. The likelihood that the Nasdaq will suffer a second-consecutive down year is extremely remote. The tech-centric index has only suffered back-to-back declines twice going all the way back to its debut more than 50 years ago. The data further suggests that the Nasdaq could rebound sharply over the coming year, having returned 34%, on average, in the first positive year following a decline. This bodes well for the technology stocks that make up the index.
If the Nasdaq does recover in 2023, MercadoLibre (MELI -0.45%) and Nvidia (NVDA 3.71%) are two stocks investors will want in their portfolios. Here's why.
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1. MercadoLibre: What slowdown?
MercadoLibre isn't a household name, at least if you live in the U.S. However, in Latin America, you'd be hard-pressed to find a consumer who isn't familiar with or using one of its services. Not only is it the undisputed e-commerce leader in each of its major markets, but it's also bringing fintech to the masses in the region.
The bear market hurt MercadoLibre's stock, which is currently down 45% from its peak. A quick look under the hood, however, shows a business that's firing on all cylinders.
In the third quarter, MercadoLibre generated record net revenue that grew 61% year over year to $2.7 billion in constant currency. The company expanded its operating margin by 500 basis points to 11%, which sent more profits to the bottom line. This resulted in record quarterly operating income of $296 million. This, in turn, pushed earnings per share (EPS) up 34% to $2.57.
The results were fueled by commerce revenue that climbed 33% to $1.5 billion, while fintech revenue of $1.2 billion soared 115%. That isn't an anomaly, either, as it marks the third consecutive quarter of triple-digit growth for its fintech segment.
Fueling the results were off-platform payments (those processed on behalf of other websites and brick-and-mortar stores not on its platform) which grew 122%. This is a big growth area for the company, marking its fourth successive quarter of triple-digit percentage gains.
Yet even as MercadoLibre continues to execute on a high level, the stock has taken it on the chin. This suggests that the declines are primarily driven by concerns about the overall economy and not any company-specific problems.
If MercadoLibre can perform at this level in tough times, imagine how much better it will do when the economy gets the "all clear." That's why investors will want MercadoLibre in their portfolios ahead of the Nasdaq's rally.
2. Nvidia: Down but not out
During times of macroeconomic uncertainty, it can be difficult to know if a stock is falling in response to the overall market conditions or if the company is really in trouble. Everybody intends to buy a stock when it's down -- that is, until it starts falling -- which is when uncertainty and doubt set in.
That's the plight facing many Nvidia investors right now. The stock has flopped 49% from its 2021 peak as the semiconductor pioneer's recent results caved under the weight of the economic slowdown. During its fiscal 2023 third quarter (ended Oct. 30), revenue declined 17% year over year to $5.9 billion, while EPS plunged 72% to $0.27.
What precipitated the dismal results? Gaming revenue, which has historically been Nvidia's bread and butter, crashed 51%, as high inflation and rising interest rates hit gamers in the pocketbook, convincing many to hang on to their existing chips just a little longer. Nvidia's data center segment carried the day, up 31%, as digital transformation and cloud computing helped bolster demand.
As bad as things seem now, focusing on one quarter -- or even a few -- can make you miss the forest for the trees. To prevent a myopic view, taking a step back can be instructive.
For the 2022 fiscal fourth quarter (ended Jan. 30), Nvidia delivered record quarterly revenue that grew 53% year over year to $7.6 billion. Much of that made its way to the bottom line, as Nvidia's profits surged 103%, resulting in record EPS of $1.18.
That performance, just months ago, suggests that the primary problem right now is the economy -- not any failure on the company's part. This further suggests that once the economy rebounds, Nvidia stock will recover and should go on to reach new heights.
A word on valuation
All this potential comes at a price. Even as valuations have fallen meaningfully since late 2021, neither of these companies are cheap in terms of traditional measures.
Nvidia and MercadoLibre are currently selling for 14 times and 3 times next year's sales, respectively, when a reasonable price-to-sales ratio is generally between 1 and 2. That said, investors tend to award a premium valuation to stocks with a strong history of performance and significant future prospects, and both Nvidia and MercadoLibre fit the bill.
Investors with the patience to let the recovery play out will no doubt be amply rewarded when the economy recovers, driving these stocks higher.
