Though there are no guarantees in the stock market, some companies have such strong business characteristics that investing in them stands to produce excellent returns -- at least, for those who don't expect results overnight. Such companies often have one or more of the following traits: They are leaders in their respective industries, they boast competitive business edges, and they have solid growth prospects.
Let's consider two examples: Airbnb (ABNB 0.75%) and MercadoLibre (MELI 3.09%). For those with $2,000 to spare -- money that isn't being saved for bills or emergencies -- here's why putting that money in these companies makes a lot of sense.
1. Airbnb
People love to travel. The hospitality industry, which includes travel, accommodations, and activities, is worth tens of billions of dollars. Airbnb seeks to make people's trips easier by providing home rentals and activities on its platform. The company is a leader in this niche. The pandemic years were difficult for Airbnb, but it has rebounded nicely since and generally records excellent financial results.
Last year, Airbnb's revenue of $9.9 billion grew by 18% year over year. Importantly, it was also 106% higher than its 2019 revenue, showing that the company's business is well above its pre-pandemic levels. Airbnb's net income more than doubled year over year to $4.8 billion -- and note the company's high profit margin of about 48.5% last year.
Airbnb does not own and operate rental properties (a low-margin activity) but merely runs a platform that matches hosts with clients, which works wonders for its margins and bottom line. The company made progress on other fronts, including its free cash flow of $3.8 billion, which increased by 11.8% year over year. Airbnb hasn't peaked yet. There are plenty of growth opportunities ahead, including the company's efforts to ramp up its business in underpenetrated markets.
Last year, Airbnb generated 83% of its revenue from North America and EMEA (Europe, Middle East, and Africa). There is ample white space in Latin America and Asia, where it has been making a push. Further, the general growth of the travel industry should provide a tailwind to Airbnb, even in places where it is already solidly established. Airbnb's revenue in North America, its largest market, is still moving in the right direction.
So despite unfavorable regulatory developments in some places, Airbnb's global opportunities remain vast, especially as the company benefits from the network effect. As the number of hosts and activities increases on its platform, it becomes more attractive to potential customers, and vice versa. It added 1.2 million active listings last year. With Airbnb's expanding ecosystem and growth prospects, the company should deliver outsized returns over the long run.
Investors can buy 12 shares of the company with $2,000.
2. MercadoLibre
MercadoLibre is the leading e-commerce platform in Latin America -- akin to Amazon -- but it's much more than that, too. It offers services that cater to merchants' needs, from its payment platform to its shipping and logistics solutions.
The company's comprehensive package of services grants it high switching costs. That is, once customers come aboard, it would take a great effort for them to switch to a competitor. Meanwhile, its main e-commerce platform benefits from a "network effect" -- the more that users buy from it, the more sellers want to be on the platform too -- and vice versa.
That's to say nothing about the difficulty of building a logistics business that can handle shipping to multiple countries in Latin America -- an expensive proposition any company looking to knock MercadoLibre off its pedestal would have to surmount. It wouldn't be easy. Despite its rock-solid position in its market, MercadoLibre doesn't always manage to impress investors. The company's most recent quarterly update was a bit of a disappointment.
In MercadoLibre's 2023 fourth quarter, net revenue of $4.3 billion increased by 42% year over year, but the company's net income remained flat at $165 million. However, that was due to a one-time tax liability expense that won't affect MercadoLibre regularly. The e-commerce specialist showed many strengths, with several important metrics remaining northbound.
Active users jumped by 49.5% to 145 million, gross merchandise volume was up almost 40% to $13.5 billion, and total payment volume landed at $56.5 billion, 57.2% higher than the fourth quarter of 2022. MercadoLibre hardly deserved its post-earnings dip, at least for investors who are focused on the long game. The e-commerce industry is projected to continue growing substantially, including in Latin America, which has one of the fastest-growing markets in the world.
No company is in a better position to benefit. In five years, MercadoLibre's recent sell-off will likely be just a blip on a chart. Investors shouldn't miss this opportunity to get in on the company, even at about $1,530 per share.
