Although some parts of the market have slightly recovered in 2023 from their 2022 declines, many stocks are still well off their highs, and trading at cheap valuation levels. That positions them potentially for rapid recoveries when the market kicks back into growth mode.
Two stocks that I think have strong recovery potential right now are Amazon (AMZN +1.43%) and MercadoLibre (MELI 0.27%). Both are trading at low valuations relative to their historical levels, and so these two e-commerce powerhouses could be an explosive combination for your portfolio.
Amazon
Stock valuations are derived by measuring a company's stock price against some financial metric -- sales, free cash flow, or earnings per share, for example. Let's consider Amazon. Because the company wasn't profitable in 2022, we'll use its price-to-sales ratio to assess its valuation.
AMZN PS Ratio data by YCharts.
At 1.9 times sales, Amazon is trading well below where it has for most of the past decade. I think this represents a massive opportunity. Back in 2015, when Amazon last traded this low, its cloud computing division, Amazon Web Services (AWS), wasn't nearly as large as it is today. That segment was the only one that produced an operating profit in Q4 2022, when it put up a respectable 24% operating margin.
Companies with higher margins tend to trade at higher valuations because they can rapidly turn revenue growth into profits. As AWS has become a more important piece of the Amazon investment thesis since 2015, one might expect that the company's valuation would be higher than in 2015, but right now, it's not.
Additionally, Amazon's international segment has been a drag on its revenue. Its overseas e-commerce sales fell 8% year over year in Q4, continuing a trend that prevailed throughout 2022. However, in 2023, it will no longer face the tough prior-year comparisons it did when it was looking back to its 2021 performance. So this year, international sales could start to grow again, boosting Amazon's stock.
Amazon made a lot of strides toward returning to profitability in the second half of 2022. If it keeps up the progress, the stock could well skyrocket, in part due to its current low valuation.
NASDAQ: AMZN
Key Data Points
MercadoLibre
MercadoLibre is less well-known in the U.S. than Amazon, but it dominates the e-commerce industry in Latin America. As a bonus, it also has a thriving fintech segment.
From a price-to-sales standpoint, MercadoLibre is trading at valuations well below the range it has occupied for nearly all of its life as a public company.
MELI PS Ratio data by YCharts.
In the case of Amazon, the market bid down its share price and price-to-sales valuation as its profitability disappeared and growth slowed. This was a logical reaction although it may have been overdone. However, MercadoLibre doesn't have either of those factors playing against it.
In Q4, its revenue rose 56% to $3 billion on a currency-neutral basis. Because MercadoLibre operates in 18 Latin American countries -- each with its own currency -- adjusting for foreign exchange rates is essential, as these currencies fluctuate in value relative to each other and the U.S. dollar.
NASDAQ: MELI
Key Data Points
MercadoLibre also significantly improved its net income margin, from a 2.2% loss in the prior-year period to a 5.5% profit margin in Q4.
It doesn't take the world's greatest investor to recognize a stock's potential when the underlying company is growing rapidly, improving its profitability, and trading well beneath its average valuation. Wall Street analysts have given MercadoLibre an average one-year price target of $1,460, predicting an upside of nearly 20%.
MeradoLibre and Amazon both have strong potential to recover further throughout 2023. Investors should take this opportunity to establish a position as the market's pessimistic sentiments about them is not likely to last.
