Growth stocks have caught fire this year. Just compare the year-to-date performance of the Vanguard Value ETF and the Vanguard Growth ETF. The value ETF is up 5%, but the growth ETF has soared by 36%.
Now that so many growth stocks have already broken out, what names should investors keep in mind as they prepare for the next bull market? These Motley Fool contributors have their sights set on three: Spotify (SPOT 0.20%), MercadoLibre (MELI 3.09%), and PayPal (PYPL 2.90%).
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Spotify could cast off its problems and skyrocket
Jake Lerch (Spotify): I'm going against the grain and picking Spotify as my breakout stock worth buying on the dip. Without a doubt, that dip is real: Shares recently tanked 14% after the company reported disappointing quarterly results and weak guidance.
There were, however, bright spots in that stinker of a quarter. First, Spotify continues to draw in new users at a breakneck pace. In Q2, total monthly active users (MAUs) jumped 27% to 551 million, premium subscribers increased 17% to 220 million, and ad-supported MAUs soared 34% to 343 million.
Granted, Spotify failed to do well at converting those new users into revenue. Total revenue increased by 11% to $3.2 billion, and gross margin fell from 25.2% in the first quarter to 24.1% in the second.
Yet for investors willing to play the long game, I see an opportunity. It's clear that Spotify is a massive platform that its users love. Hundreds of millions are willing to pay for subscriptions. Nevertheless, the current management team is struggling to capitalize on its appeal.
However, Spotify is cutting costs and hiking prices. That should help increase its gross margins and set the company on a path to profitability. For investors willing to hold the stock through volatility, Spotify looks like a name to buy on the dip.
PayPal's market-beating run could be just beginning
Justin Pope (PayPal Holdings): Fintech company PayPal Holdings has been a brutal hold for shareholders over the past five years, but its fortunes could soon change. The stock has outperformed the Nasdaq Composite since June 1, and its rally seems ready to pick up steam.
PayPal was one of the first digital payments companies and built its business on online payments. Today, more than 430 million people worldwide move money on its network. That's more than $1.2 trillion in annual payment volume and $28 billion in revenue from the fees PayPal charges.
So, why did the shares falter? Some may point to a ruthlessly competitive payments industry, where companies like Apple, Block, and Alphabet are battling for wallet share. The pandemic also boosted its growth when people by necessity were conducting more transactions online, creating a bulge of growth that PayPal has struggled to follow.
But the pendulum of market sentiment has seemingly swung too far. While PayPal's stock price is down relative to where it traded five years ago, the company's revenue has almost doubled in that time, and free cash flow has grown by nearly 50%.
PYPL Revenue (TTM) data by YCharts.
PayPal's future still looks bright, despite the fierce competition it faces. Analysts believe the company will grow its earnings per share by an average of almost 18% annually over the next three to five years. Shares trade at a forward price-to-earnings ratio of 15 and a price/earnings-to-growth ratio of less than 1. In other words, the stock is a bargain based on its expected earnings growth.
The company reports second-quarter earnings on Aug. 2. Strong operating results could turn PayPal from one of the market's most interesting value ideas to a big-time winner in the year's second half.
Synergies are driving growth for the Latin American e-commerce leader
Will Healy (MercadoLibre): At first glance, one might assume MercadoLibre's (MELI 3.09%) share price has already hit its "breakthrough." The stock has risen by more than 4,000% since its 2007 initial public offering, and the company has built a leadership position in Latin American e-commerce and fintech while also prospering in other areas.
Despite that progress, the growth story for this internet and direct marketing retail company is not showing signs of significant slowing. In the first quarter, MercadoLibre reported $3 billion in net revenue, a 35% increase from the same quarter last year.
That's only a tiny fraction of the $106 billion in e-commerce revenue reported by Amazon, indicating that MercadoLibre has more growth ahead. Also, due to its investments in Latin America, it continues to fend off competition in the region from Amazon, Sea Limited, and other large peers.
One focus of those investments has been the payments infrastructure that has driven the success of its Mercado Pago segment. Mercado Pago was a pioneer in Latin American fintech. In addition to facilitating digital payments for the unbanked, it has also created opportunities such as protecting money for its customers in Argentina, who contend with triple-digit inflation.
Additionally, its investments extend to digital advertising, which can serve as an added source of revenue. Moreover, the company helps many of its sellers deliver their goods through its logistics arm, Mercado Envios. All these businesses combine to bolster revenue for one another and make MercadoLibre a formidable competitor in its home region.
Investors will also like that it's profitable. In Q1, MercadoLibre reported a net income of $201 million, and it looks to be on track for its third consecutive profitable year.
Admittedly, the stock's price-to-earnings ratio of 97 may seem pricey, but rapid profit growth should reduce that earnings multiple over time. And despite a 40% gain since January, MercadoLibre trades at a price-to-sales ratio of 5, near its lowest level since 2009. Between the low sales multiple and its potential for continued revenue and profit growth, MercadoLibre stock should continue to move higher.
