One can forgive investors for assuming that hypergrowth is a phenomenon of the past. Numerous companies that once reported massive revenue increases saw their growth slow or, in some cases, give way to declines.
However, some companies sidestepped the slowdowns and maintained high growth rates. Even as their shares declined in the bear market, MercadoLibre (MELI -0.45%) and Zscaler (ZS -1.49%) have continued to show strong results that should benefit their shares over time.
MercadoLibre
MercadoLibre may not seem like an obvious hypergrowth stock. Since it only operates in Latin America, U.S. investors may know little about it. And those who know it may think of it as an e-commerce company.
Indeed, the company continues to revolve heavily around e-commerce. Nonetheless, the "hypergrowth" part of the company centers around its fintech business, Mercado Pago.
Latin America is a primarily cash-based society in an increasingly digital world. Mercado Pago helps bridge that gap by offering financial products that allow people to send and receive money digitally. It initially just served MercadoLibre customers, but it became so successful that the company began to support customers wanting to buy and sell products outside of MercadoLibre.
Additionally, the company operates Mercado Credito to provide consumer loans and Mercado Envios to help companies store, package, and deliver their goods. All of these separate segments form a synergistic relationship that likely gives MercadoLibre a competitive advantage over prospective competitors.
Mercado Pago is now the company's fastest growth driver. In the first nine months of 2022, revenue of $7.5 billion grew 53% year over year. Over that time, total payment volume surged 65%, compared to the 22% increase in gross merchandise volume.
While MercadoLibre stock is down 40% from its all-time high, it has nearly doubled from last summer's low, indicating it is in a recovery mode. And with the stock selling at about 6 times sales, investors may take an interest in this growth stock to buy while the valuation is relatively low.
Zscaler
Zscaler is a cybersecurity company for a cloud-based world. It offers "zero trust" security, treating every interaction as a potential threat until the software determines otherwise. Zscaler deploys its software in such a way that it can respond more rapidly to potential attackers.
It is not the only solution, as products created by Palo Alto Networks, CrowdStrike, and others also compete in this business. However, McKinsey estimates the cybersecurity market could reach $2 trillion, indicating the industry could offer massive growth and room for several competing companies.
Knowing that, it is little wonder Zscaler seems relatively immune from the slump in the tech industry. In the first quarter of fiscal 2023 (which ended Oct. 31), revenue of $356 million grew 54% year over year. That only slightly lagged the growth in fiscal 2022 (which ended July 31) of 62%.
Zscaler has only about 2,200 customers who spend more than $100,000 on the platform. Still, the cybersecurity stock reported a net retention rate exceeding 125%, meaning the average customer spent 25% more on the platform than they did one year ago. That does not include customer growth, which rose by 37% over that period.
That success did not prevent a GAAP loss or a bear-market-driven decline in the stock. Additionally, its price-to-sales ratio of 16 makes it a more expensive stock than either Palo Alto or CrowdStrike.
Nonetheless, that sales multiple is not far above its record lows. And even if it covers a relatively small percentage of its large addressable market, it could see massive growth in the coming years.
