Stock splits can be advantageous for investors for two reasons. First, they make a stock more accessible by reducing the price per share. Second, they call attention to stocks that have undergone substantial price appreciation, and that generally means the underlying business is doing something right.
HubSpot (HUBS -0.78%) and MercadoLibre (MELI 3.09%) fit that description. They have achieved five-year returns of 310% and 380%, respectively, qualifying both as stock split candidates in 2024.
That share price appreciation was a product of financial strength and compelling growth prospects. Those qualities make HubSpot and MercadoLibre worthwhile long-term investments whether or not the stocks split.
Here's what investors should know.
1. HubSpot
HubSpot touts its position as the leading customer relationship management (CRM) platform for scaling businesses. Its portfolio includes applications for marketing, sales, customer service, and operations, as well as tools for content management and payments. Those products are integrated on a single platform that helps businesses more efficiently generate leads, convert leads into customers, and maintain lasting relationships with those customers.
HubSpot is a leader in marketing automation software, and the company has a strong presence in the small-business CRM market, where its freemium pricing is particularly attractive. HubSpot is also making an effort to win larger customers by adding more sophisticated features to its platform. For instance, the company recently relaunched its sales software with improved prospecting and deal management capabilities.
HubSpot reported strong financial results in its third quarter (ended Sept. 30, 2023). Revenue increased 26% to $557 million on strong customer growth and a modest increase in customer spending. Additionally, non-GAAP (adjusted) income more than doubled to reach $83 million as the company saw cost benefits from more conservative hiring and infrastructure optimization.
HubSpot recently announced pricing changes that remove seat minimums and introduce view-only seats to make initial adoption easier. The new pricing model also includes higher fees for certain products, which should boost customer spending.
Additionally, the company recently announced a wave of artificial intelligence features that will automate workflows across its CRM platform, from forecasting sales to creating marketing content. Those tools are another reason for businesses to choose HubSpot.
CRM spending is expected to increase 14% annually through 2030, but HubSpot's strong market presence should support faster growth. Wall Street expects the company to grow sales at 21% annually over the next five years. That forecast makes its current valuation of 14.7 times sales seem fair, and that multiple is a discount to the three-year average of 16.5 times sales. Investors with a five-year time horizon can buy a small position in this stock with confidence.
2. MercadoLibre
MercadoLibre hosts the largest online commerce and fintech ecosystem in Latin America. It accounted for 29% of regional e-commerce sales in 2022, more than the next five digital retailers combined, and its market share is projected to increase 2 percentage points by 2027, according to Morgan Stanley. That scale creates a network effect that naturally draws more merchants and consumers to its commerce and payments ecosystem.
Additionally, MercadoLibre accelerates that virtuous cycle by providing adjacent merchant services for financing, logistics, and advertising. The company also offers consumer credit cards and loans. Those products are resonating across the board. MercadoLibre hit record fulfillment penetration of 48% in the third quarter (ended Sept. 30, 2023), and its credit portfolio increased 23% even as past-due accounts trended downward. Additionally, advertising revenue has increased faster than 70% for six consecutive quarters.
MercadoLibre delivered an impressive financial performance in the third quarter. Total revenue increased 40% to $3.7 billion on particularly strong growth in the commerce segment driven by growing adoption of advertising and logistics services. Also, net income according to generally accepted accounting principles (GAAP) more than doubled to reach $359 million as profit margin expanded nearly 5 points on improved credit quality and higher interest income.
MercadoLibre also has several secular tailwinds. Its three core geographies (Argentina, Brazil, and Mexico) will rank among the five fastest-growing e-commerce and advertising markets in the world through 2027, according to eMarketer. And momentum in e-commerce implies strong growth in digital payments as well.
Wall Street expects MercadoLibre's sales to increase at 24% annually over the next five years. That consensus estimate makes its current valuation of 6.6 times sales look cheap, and that multiple is a discount to the three-year average of 8.6 times sales. Investors should feel confident about buying a few shares of this growth stock today.
