Warren Buffett studied business under Benjamin Graham at Columbia University. Graham is widely recognized as the father of value investing -- a strategy that focuses on finding stocks that trade below their intrinsic value -- and his teachings had a profound impact on Buffett.
However, valuation is not the only metric that matters. Buffett offered the following advice in his 1989 letter to Berkshire Hathaway shareholders: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Here are two wonderful growth stocks to buy now.
1. Airbnb
Airbnb (ABNB -3.18%) operates an online travel marketplace that connects guests with rental properties from millions of hosts around the world. Its ability to crowdsource lodgings makes the company nimbler and more efficient than traditional hospitality businesses like Marriott. In other words, building hotels takes a lot of time and money, but Airbnb can expand its inventory in minutes (and with little expense) by simply onboarding new hosts.
Airbnb's business model also affords guests more flexibility in terms of lodging type and location. Its marketplace lists a broad range of rentals, from mountainside cabins and coastal cottages to suburban estates and urban apartments. Guests can even book more exotics stays at castles, mansions, and treehouses. Additionally, traditional hospitality companies may find it difficult to run a profitable hotel in rural destinations or small towns, but Airbnb suffers from no such constraints.
The company reported solid financial results in the first quarter despite the challenging economic environment. Revenue climbed 20% to $1.8 billion, and free cash flow (FCF) rose 32% to $1.6 billion, which brings its FCF margin to 44% over the last four quarters. That makes Airbnb much more profitable than traditional hospitality companies. Marriott and Hilton achieved FCF margins of just 11% and 18%, respectively, over the same period.
Looking ahead, Airbnb is well positioned to grow its business. It holds about 23% market share among online travel agencies, second only to Booking Holdings, and the company has captured just 2% of its $3.4 trillion addressable market. But Airbnb has launched new products and features rapidly in recent years -- such as free damage and liability insurance for hosts, and a more customizable search experience for guests -- and that capacity for innovation should bring more hosts and guests to its marketplace over time.
Currently, shares trade at 8.1 times sales, a discount to its historical valuation of 16.8 times sales and a fair price to pay, given its growth opportunities.
2. MercadoLibre
MercadoLibre (MELI -1.01%) runs the most popular online marketplace in Latin America. It accounted for 20.9% of domestic digital retail sales last year, according to eMarketer, and that figure is expected to reach 21.6% this year. MercadoLibre has reinforced its strong competitive position with adjacent products for digital advertising, financial services, and logistics. In fact, subsidiary Mercado Pago is the third-most-popular digital wallet among Latin American consumers.
MercadoLibre has delivered impressive financial results like clockwork of late, and that trend continued in the first quarter despite the challenging economic environment. Total revenue increased 35% to $3 billion, and generally accepted accounting principles (GAAP) earnings skyrocketed 205% to $3.97 per diluted share.
MercadoLibre breaks its business into two segments, commerce and fintech, and fintech services were once again the primary growth driver in the first quarter. Fintech revenue increased 40% to $1.4 billion, while commerce revenue rose 31% to $1.7 billion.
However, growth in commerce revenue still outpaced the 23% growth in gross merchandise volume (GMV), indicating that MercadoLibre is monetizing that segment more efficiently. The commerce take rate (i.e., commerce revenue as a percentage of GMV) expanded 110 basis points as adoption of logistics and digital advertising services increased. That means MercadoLibre is deepening its ties with merchants, and investors can expect that momentum to continue in the future.
According to Statista, retail e-commerce sales in Latin America will increase at 14% annually to reach $250 billion by 2027, and digital payments volume will increase at 15% annually to hit $575 billion over the same period. MercadoLibre, as the largest online commerce and payments ecosystem in the region, should benefit from those tailwinds. But the company is also well positioned to benefit from growth in the digital ad market.
Amazon has used its popular marketplace to build a booming ad tech business, and MercadoLibre is following the same blueprint. The company has worked diligently to enhance its ad tech offering over the past year, and it plans to accelerate its investments in the coming quarters. For context, internet ad spend in Latin America is expected to grow at nearly 14% this year, providing yet another tailwind for MercadoLibre.
Currently, shares trade at 5.9 times sales, a bargain compared to the three-year average of 11.9 times sales and a fair price to pay, given its growth prospects.
