Finding a stock that rises 10-fold in value within a short time frame requires luck even for experienced investors. But if you buy a stock that compounds in value by 15% per year, the value of your investment will grow by just over 10-fold within 17 years. And finding investments with that potential is possible if you know what to look for.
You want to invest in companies with annual revenue growth of more than 15%. It also helps to invest in companies that serve growing industries.
A promising candidate that fits that description is MercadoLibre (MELI 3.09%) -- operator of the largest online marketplace and payments platform in Latin America. The stock rose nearly 10-fold over the last decade, and there are a few reasons it could rise another 10-fold within the next couple of decades.
E-commerce tailwinds are driving strong growth
The aftermath of the pandemic and macroeconomic headwinds might have slowed the broader retail sector lately, but e-commerce is not done growing. Morgan Stanley expects e-commerce spending globally to grow from $3.3 trillion in 2022 to $5.4 trillion in 2026.
Latin America is one of the fastest-growing e-commerce markets, and as the leading e-commerce company in the region, MercadoLibre has reported strong growth over the past decade. It offers an online marketplace, mobile payments, consumer credit, and advertising and logistics solutions for sellers. In Q1 (its most recently reported quarter), revenue grew 58% year over year on a constant-currency basis, which is consistent with its previous 10-year record.
This consistency reflects a competitive advantage. Amazon also competes in Latin America, but MercadoLibre distinguishes itself with a localized shopping experience. Plus, as the regional leader with over 100 million unique users, the company benefits from having a large base of customers, which attracts more buyers and sellers, and drives tremendous growth across the business.
Margin expansion is another catalyst
MercadoLibre is in a great competitive position that should allow it to grow at least in line with the broader e-commerce market. Since e-commerce sales in leading markets like Brazil, Mexico, and Argentina are expected to grow by more than 20% per year, the company's revenue should grow enough to deliver the returns that growth investors are looking for.
Another potential boost to the stock could come from the company's rising profit margin. Over the last few years, MercadoLibre has achieved a profit margin of 5.5%, which is below its average of about 10%. As revenue continues to grow faster than the company's operating expenses, profits can grow faster than revenue over the next several years and fuel market-beating returns.
Data source: YCharts.
Analysts expect MercadoLibre's earnings per share to grow at an annualized rate of nearly 50% over the next five years. It's a reasonable estimate considering the company's revenue growth, its ability to gain market share in a fragmented e-commerce market, and its opportunities to use technologies such as artificial intelligence to increase productivity and boost profits.
The market expects lots of growth, which is why the stock trades at a high forward price-to-earnings ratio of 68. But it's not all that expensive considering its growth expectations.
A better indicator of the upside potential in the stock is its price-to-sales ratio of 5.6. That is a large discount compared to leading e-commerce solutions platform Shopify, whose revenue is not growing as fast as MercadoLibre's.
If you're looking for a stock with the potential to compound in value at 15% per year and potentially deliver a 10-fold return in less than two decades, this top e-commerce company checks all the boxes. MercadoLibre has solid competitive advantages in a growing market, plus opportunities to improve margins and grow earnings at a high annual rate that can support a higher stock price.
