Finding stocks on sale doesn't necessarily mean they are well off their all-time highs or have a low dollar figure attached to the price. Instead, I believe stocks that aren't aligned with future expectations are the cheap ones worth considering. While some investors prefer to wait for a market crash to snatch these stocks up for cheap, I think the two shares below are already at a level where any pullback wouldn't necessarily provide investors a much better opportunity.
The two cheap stocks on my watch list are Amazon (AMZN 3.43%) and MercadoLibre (MELI 3.09%) as these two commerce giants are excelling but their stock prices don't reflect that progress. So, if you're looking to grab two stocks with incredible upside, keep reading.
Amazon
If you don't know Amazon and live in the U.S., you may have lived under a rock for the past decade. Amazon's e-commerce infrastructure has changed the way consumers shop, but it's much more than that. With budding business segments like advertising and stalwarts like its cloud computing business, Amazon Web Services (AWS), Amazon has become one of the world's most important companies.
Thanks to Amazon's transformation to higher-margin businesses, its gross margin has significantly improved. A higher gross margin comes with a higher profit margin potential, making the company more valuable. While Amazon is still improving its profit margin, its gross margin has substantially risen over the past few years. CEO Andy Jassy has prioritized efficiency, so this profit margin should eventually follow alongside the gross margin's rise.
However, this rise isn't baked into the stock price, making it seem like investors aren't expecting the profit margin to improve.
AMZN Profit Margin data by YCharts
At 2.5 times sales, Amazon is valued around levels last seen in 2016 when its gross margin was nearly half the current levels. If Amazon can improve its profit margin to the 7% to 8% range and sustain it (like it did for a split second at the end of 2021), the stock will be incredibly cheap.
An 8% profit margin for Amazon right now would value the stock at 31 times earnings, a fair price to pay for a company with Amazon's growth and potential. With Amazon continuing to add high-margin businesses to its mix (like Amazon adding ads to its Prime Video service), this margin is on the right track.
Amazon stock is cheap right now, and if it continues on its trajectory, it will be a fantastic investment.
MercadoLibre
MercadoLibre is sometimes called the Amazon of Latin America, but it's also so much more than that. While MercadoLibre has an e-commerce store and fulfillment network, it also has digital payments and a consumer credit division to bolster its business. This combination has been incredible and has allowed MercadoLibre to expand rapidly (its revenue is up 787% in five years).
Similar to Amazon, MercadoLibre's margins are also starting to improve drastically. Because MercadoLibre was unprofitable for a couple of years to capture its vast market opportunity, investors aren't sure what a fully profitable MercadoLibre looks like. As a result, they may not know how to value the stock. However, it seems odd that the stock is valued at a decade-low despite improving margins.
MELI Profit Margin data by YCharts
Although MercadoLibre's days of mid-20% profit margins are gone, mid-teens profit margins aren't out of the question. In Q2, MercadoLibre posted a 7.7% margin, a vast improvement from last year's 4.7% figure. Should MercadoLibre continue down this path of gradual margin improvement, the stock will continue to look even cheaper.
With a 15% profit margin, MercadoLibre would be trading at 36 times earnings, which is a bit expensive. However, MercadoLibre is still rapidly growing its revenue (it was up 32% in Q2), so growth still has a large part to play in making MercadoLibre's stock even cheaper.
MercadoLibre has a long road ahead of it to improve its margins, but it has the potential to do it with its high gross margin. This potential makes MercadoLibre one of my top growth stocks to own right now, and investors should benefit by purchasing this stock now and holding it over the next three to five years.
