With the stock market recently hitting new all-time highs, there are many stocks I'm worried about being richly valued. While they might eventually grow into those valuations, I'm looking for stocks that are still reasonably priced that could benefit from a multiple expansion.
Three that come to mind are Amazon (AMZN 3.43%), Meta Platforms (META 0.43%), and MercadoLibre (MELI 3.09%). All three companies are still reasonably priced, and I think they make for strong buys now.
1. Amazon
Amazon is far more than an e-commerce store. It's becoming more of a service-driven business, with its third-party seller, advertising, subscription, and cloud-computing services providing a large chunk of its revenue.
This has raised its margins across the board as its service divisions grew to become a larger portion of the company.
AMZN gross profit margin (quarterly); data by YCharts.
With its gross margin hitting all-time highs and operating and profit margins not far behind, the transition of Amazon from a marginally profitable to a high-profit company is becoming a reality. While this chart doesn't include Q4 figures, they were phenomenal, with its gross, operating, and profit margins coming in at 17.2%, 7.8%, and 6.2% respectively..
However, when a company's margins rise, its valuation should also increase. This is because the business can squeeze more profits out of every dollar it brings in -- which is why software companies have much higher valuations than retailers.
But despite Amazon's gross margins nearly doubling since 2017, it's valued at the same level.
AMZN gross profit margin (quarterly), data by YCharts; PS = price to sales.
This doesn't make sense, and with another year of strong profit growth, don't be surprised if Amazon's stock earns a greater valuation by the end of this year.
2. Meta Platforms
Meta Platforms (probably better known by its former name, Facebook) has a lot of investments in the metaverse and the augmented- and mixed-reality space, but it's still primarily an advertising company.
And that's a tough industry to be in because ad budgets are slashed if a company thinks a recession is ahead. This affected Meta in late 2022 and 2023, but the ad market has rebounded along with increased optimism.
In the fourth quarter, Meta's ad revenue grew 24% to $38.7 billion, a new all-time high.This strength is expected to continue into the first quarter, with management estimating total revenue will be $35.8 billion, for 22% growth.
And because Meta is now optimized for profits, its earnings per share (EPS) should explode higher, making the stock look cheaper on a price-to-earnings (P/E) basis.
So, while Meta might look expensive from a trailing P/E basis (30 times earnings), its forward P/E (which uses analyst projections for the next 12 months) is a bit cheaper at 26 times earnings. As the ad market continues to strengthen, this will boost the business and bring its stock price along with it. As a result, Meta looks like a great buy now.
3. MercadoLibre
MercadoLibre has a similar story to Amazon, which makes sense: Many call it the "Amazon of Latin America." While this is true for one aspect of the business (MercadoLibre has a dominant e-commerce store and shipping logistics division), that description sells the company short. What it has that Amazon doesn't is a fintech and consumer credit division.
With more than 40% of revenue coming from fintech, it's a well-balanced company. And like Amazon, MercadoLibre has dramatically improving margins.
MELI gross profit margin (quarterly); data by YCharts.
While its gross margin has remained fairly steady, its operating and profit margins have expanded significantly. In the third quarter, the operating margin increased 7.2 percentage points to 18.2%, and its profit margin rose 4.7 percentage points to 9.5%.
Despite this increase, MercadoLibre trades at levels not seen in over a decade.
MELI profit margin (quarterly) data by YCharts.
As a result, I think MercadoLibre is a fantastic buy here, as its stock price looks undervalued compared to historical trends.
