With the Nasdaq Composite up 33% this year, finding good deals in the market is getting harder. But three Motley Fool contributors see upside in Starbucks (SBUX 0.47%), Roblox (RBLX 1.35%), and MercadoLibre (MELI 3.09%). Let's see why these top growth stocks could take off.
A new kind of Starbucks in town
Jennifer Saibil (Starbucks): It's full steam ahead for coffee king Starbucks. Despite inflation and an increasingly competitive landscape, Starbucks is posting growth, opening new stores, and showing it's as relevant as ever.
That doesn't mean it's not dealing with any challenges. The previous chief executive left amid the company's strategy feeling outdated in a new era of digital and delivery. Former CEO Howard Schultz returned for a third stint to lead the company into its next phase, and after identifying a new way forward, he recently handed the reins over to current CEO Laxman Narasimhan.
The revamped strategy focuses on harnessing artificial intelligence and technology to offer quick service in formats that work for today's clientele. More customers are looking for pickup and delivery, in contrast to the company's previous focus on being a gathering place. Starbucks is opening more drive-thrus, pickup-only stores, and curbside-pickup lanes and is investing in more advanced equipment for improved customization.
So far, so good. In the fiscal third quarter, revenue increased 12% over last year to $9.2 billion, with a 10% increase in comparable sales.The China market is finally rebounding after pandemic closures, and comps from that market increased by 46%. Earnings per share climbed 19% to $1.00, beating analyst expectations of $0.95. Operating margin widened from 15.9% to 17.3%. Starbucks opened 588 new stores to cross the 37,000 mark.
It has also improved its loyalty program to be more in line with its digital focus, and active members increased to 31.4 million at the end of the quarter, a 15% year-over-year increase.
Starbucks stock rose after the report, but it's only up 5% in 2023, even with the gain. At this price, shares are trading at a price-to-earnings ratio of 34. There's plenty of room for the stock to run as Starbucks continues to open new stores, generate customer engagement and loyalty, and increase profits -- and at the current valuation, it's priced to buy.
Invest where young people are spending more time
John Ballard (Roblox): This popular gaming platform is starting to see growth reaccelerate after a sluggish 2022. Over the last four quarters, bookings (or adjusted revenue) has improved from a decline of 3% year over year to an increase of 23%, and a rebound in growth across the gaming industry could spell more upside for the stock.
Roblox has emerged as one of the most popular platforms where young people hang out with friends in a virtual environment and play games, among other activities. Even while bookings flattened out last year, the platform never stopped growing amid the challenging macroeconomic environment. Growth in daily active users never dipped lower than 19% in the fourth quarter of 2022 before accelerating to 22% in the first quarter.
The continued growth in the platform will only strengthen Roblox and position it for more success. Management has been investing all its revenue into new features, developer fees, data center infrastructure, and research and development expenses. Management credited the investments in expanding its product development teams for accelerating growth entering the year.
With many of these investments behind the company now, management expects bookings to grow faster than expenses for hiring and compensation. As a result, investors should look for growing free cash flow to push the stock higher over the next few years.
An e-commerce winner
Jeremy Bowman (MercadoLibre): One stock I watched closely this earnings season is MercadoLibre, a leading e-commerce platform in Latin America.
Following in the footsteps of Amazon, MercadoLibre has grown from a first-party direct online retailer to a diversified e-commerce empire with a large marketplace, logistics unit, burgeoning advertising business, finance arm, and most importantly, its digital payments platform, MercadoPago, which now primarily services payments off MercadoLibre's platform, including in brick-and-mortar retail stores through its mobile point-of-sale (POS) devices.
While most of the global e-commerce industry has been challenged by slowing growth following the pandemic-era boom, MercadoLibre has bucked the trend, posting strong results. In its second-quarter earnings report, MercadoLibre reported a 57% increase in currency-neutral revenue to $3.4 billion, with gross merchandise volume (GMV) up 47% to $10.5 billion and total payment volume nearly doubling, up 97% to $42.1 billion.
Even better, MercadoLibre's profitability continues to expand, thanks to growth in higher-margin, such as its marketplace, digital payments, and advertising. Income from operations more than doubled from $250 million to $558 million in the quarter as MercadoLibre is investing further in profit drivers, like advertising. Additionally, the company benefited from the bankruptcy of Americanas, its close competitor in Brazil.
MercadoLibre has also fended off competition from challengers like Amazon and Sea Limited, which have recently been more focused on cutting costs in their e-commerce divisions to deliver profits. As the Latin American middle class continues to expand, MercadoLibre has a large growth opportunity ahead of it, and the e-commerce stock could jump further if it can keep reporting strong numbers in future quarters.
