The macroeconomic climate has become much less business-friendly over the last 18 months, and stocks have fallen accordingly. In fact, the S&P 500 delivered its worst return since the Great Recession last year, and the index is still deep in bear market territory. But smart investors know that a bear market is a buying opportunity.
Eventually, the economy will regain its momentum, and the next bull market will breathe new life into many fallen stocks. In the meantime, shares of Mastercard (MA 1.33%) and MercadoLibre (MELI 1.96%) are trading at reasonable prices, especially in the context of future growth opportunities.
Here's why these growth stocks are worth buying.
1. Mastercard
Mastercard is a gateway to the global economy. The company operates one of the largest payment networks in the world, and it monetizes that infrastructure in three ways. Mastercard keeps a percentage of the gross dollar volume (GDV) that moves along its network, it charges a fee for switching (authorizing and settling) payment transactions, and it provides value-added services like cybersecurity and business analytics.
Mastercard has a virtually unbreakable competitive advantage. Its acceptance network spans 100 million merchant locations, a figure only Visa can match, and that ubiquity creates consumer expectations that obligate future merchants to participate.
Additionally, the highly scalable nature of the business (Mastercard pays next to nothing to switch each incremental transaction) strongly discourages new competitors from entering the market. Mastercard could easily undercut their pricing. Finally, fintech companies may be perceived as competition, but digital wallets like PayPal and Apple Wallet still rely on card networks.
Despite macroeconomic headwinds, Mastercard reported solid financial results last year. GDV increased 6%, and switched transactions jumped 12%. In turn, revenue rose 18% to $22.2 billion, and GAAP net income climbed 17% to $10.22 per diluted share. Better yet, as a gateway to the global economy, Mastercard should have no trouble maintaining that momentum for years to come.
Card payments will increase at 5.6% annually through 2030, according to Nilson Report. That will undoubtedly be a tailwind, but Mastercard should grow even faster as new products take root. That includes solutions for account-based payments (consumer bill pay, business-to-business) and disbursements (digital wallet payouts, insurance claims), as well as value-added services.
With that in mind, investors can reasonably expect revenue to grow in the low- to mid-teens through the end of the decade. That makes Mastercard's current price-to-sales ratio of 15.5 look reasonable, and it's certainly a discount to the five-year average of 18 times sales. That's why this growth stock is worth buying today.
2. MercadoLibre
Latin America has one of the fastest-growing internet penetration rates in the world. That secular shift is paving the way for digital transformation, and it portends explosive expansion of the e-commerce, digital payments, and digital advertising markets in the region. MercadoLibre is perfectly positioned to benefit from those trends.
MercadoLibre operates the largest online commerce and payments ecosystem in Latin America. Its marketplace receives four times as many visitors as the next most popular site, and it accounted for 21% of retail e-commerce sales in the region last year. The company has reinforced its leadership with adjacent services for payment processing, logistics, financing, and digital advertising, adding momentum to the flywheel that drives its business.
MercadoLibre delivered strong financial results last year. Revenue climbed 49% to $10.5 billion, and free cash flow (FCF) soared sevenfold to $2.5 billion, representing a solid FCF margin of 24%. But investors should be particularly pleased by the increasing take rate in both business segments. The commerce take rate increased 20 basis points due to higher shipping fees and digital ad revenue, and the fintech take rate increased about 50 basis points due to higher lending fees and credit revenue. In other words, merchants and consumers are deepening their relationships with MercadoLibre by adopting more services.
In the coming years, experts expect booming growth in the Latin American internet economy. Statista says domestic e-commerce sales will increase at 14% annually to reach $250 billion by 2027, while digital payments volume will increase at 15% annually to reach $575 billion during the same period. But given its strong position in both markets, MercadoLibre should have no problem outpacing the industry average, especially with its digital ads business starting to gain traction.
Currently, shares trade at 5.7 times sales, a bargain compared to the three-year average of 12.5 times sales, and a reasonable price to pay given the potential upside. That's why investors should buy this stock without hesitation.
