You don't have to be a value investor to appreciate a good deal. If you can find a stock with solid growth prospects at a great price, you can get the best of both worlds and likely set the stage for a portfolio-defining investment.
Two stocks I think fit this description are Alphabet (GOOGL 0.35%) and MercadoLibre (MELI -1.98%). Read on to discover why these two have substantial upside yet are cheaply valued.
1. Alphabet
Alphabet is the parent company of Google, YouTube, and the Android operating system. Despite having a broad portfolio of brands, Alphabet's revenue depends on one thing: Advertising. In the fourth quarter, 78% of Alphabet's revenue came from advertising sources.
Companies become more conscious of their advertising expenses as the economy slows down. Advertising is a fairly easy expense to pull back on compared to cutting projects or laying off employees, so many companies choose to slash ad budgets. This harms an advertising-dependent company such as Alphabet.
Fortunately, this slowdown doesn't last forever. Usually, this spending returns when the economic outlook improves, which will be a massive catalyst for Alphabet's stock. In Q4, Alphabet's advertising revenue shrank by 4% but was bolstered by cloud computing growth of 32% as well as "Google other," which includes the Google Play Store and YouTube TV subscriptions.
Alphabet's revenue will rapidly increase when advertising spending returns, as the other divisions are still performing well. This will help reverse Alphabet's falling earnings, which decreased from $1.53 earnings per share (EPS) to $1.05 in Q4. There are still Alphabet's rising expenses to consider, but management has taken corrective action on this course with a recent round of layoffs.
The stock currently trades at a much lower price-to-free cash flow (FCF) ratio than it has over the past decade.
GOOGL Price to Free Cash Flow data by YCharts.
With Alphabet's FCF in bad shape thanks to overhiring and weak advertising revenue, this valuation has the potential to get even cheaper as advertising spending returns.
However, the stock will likely recover long before its FCF does. Investors shouldn't hesitate to take a position in Alphabet, as any strength in advertising revenue will probably send the stock skyrocketing.
2. MercadoLibre
Although 2022 was rough for most e-commerce companies, MercadoLibre had a fantastic year.
MercadoLibre's operations are focused in 18 Latin American countries and include an online store, shipping logistics, digital payments, and a consumer credit division. In Q4, MercadoLibre grew its revenue by 56% when assessed from a currency-neutral (FX) basis. FX-neutral comparisons are vital with various currencies that fluctuate more than the U.S. dollar, and investors should use them when assessing a company like MercadoLibre.
Digging in deeper, commerce revenue rose 36%, and fintech exploded 93% higher. MercadoLibre's revenue won't increase as quickly over the next few years because it isn't expanding its credit division anymore (it's trying to get a handle on its current portfolio). However, Wall Street analysts still project strong revenue growth of 24% in 2023 and 2024. Despite this, MercadoLibre trades at a historic valuation low.
MELI PS Ratio data by YCharts.
MercadoLibre is a bargain here, and with rapid growth still expected in the coming years, it should experience strong stock price appreciation. It's also turning the profitability corner, with its net income margin rising from a 2.2% loss in Q4 2021 to a 5.5% profit in 2022.
As investors realize MercadoLibre doesn't have the same struggles domestic commerce companies do, MercadoLibre's stock should recover. But as it sits, MercadoLibre is a no-brainer buy.
