Stock splits can help investors identify exceptional companies. Specifically, splits are necessary only after substantial and sustained price appreciation, which rarely happens to mediocre companies. The split itself is somewhat irrelevant. It's the share price appreciation that tells investors a company is doing something right.
CrowdStrike (CRWD 2.03%) and MercadoLibre (MELI 3.09%) are good examples. Their shares soared 710% and 185%, respectively, over the last four years. That means both stocks trounced the S&P 500, which returned 90% during the same period. That outperformance can be attributed to strong financial results and promising growth prospects in both cases.
While CrowdStrike and MercadoLibre are certainly stock split candidates at their current prices, both stocks are worthwhile investments, whether those splits happen or not. Here's why.
1. CrowdStrike Holdings
CrowdStrike provides cybersecurity software. Its platform integrates more than two dozen modules that address several security markets, and the company has a strong presence in many of them. Most notably, CrowdStrike is the market leader in endpoint security and continued to gain share faster than its peers last year. The company is also a recognized leader in cloud security and threat intelligence services.
Investors can attribute that success to superior artificial intelligence (AI) and its ability to simplify security operations through workload consolidation. To quote CEO George Kurtz, "Our AI trained on cybersecurity's richest dataset drives the industry's most comprehensive protection and automation." Additionally, while most businesses use dozens of point products to meet their security needs, CrowdStrike can improve efficiency by unifying security operations on a single platform.
CrowdStrike reported strong financial results in the fourth quarter. Revenue increased 33% to $845 million as the company added new customers and existing customers bought more modules. On the bottom line, non-GAAP (generally accepted accounting principles) net income more than doubled to $236 million. Management also reported a gross retention rate of 98%, meaning the company keeps most of its customers. Investors can expect similar results in the future.
Cybersecurity spending is forecasted to increase at 12% annually through 2030, but CrowdStrike should outpace the industry as it continues to gain share. Indeed, in 2023, the company took third place on the Fortune Future 50 list, an annual ranking of the world's largest companies based on long-term growth prospects. Wall Street expects CrowdStrike to grow sales at 28% annually over the next five years.
In that context, its current valuation of 25.4 times sales is tolerable, though certainly not cheap. Investors comfortable with volatility should consider buying a small position in this growth stock today, provided they plan to hold their shares for at least three to five years.
2. MercadoLibre
MercadoLibre is the e-commerce market leader in Latin America. It not only operates the most-visited online marketplace in the region but also reinforces its strength with adjacent services through various subsidiaries. That includes payment processing and credit products (Mercado Pago and Mercado Crédito), logistics support (Mercado Envíos), and ad tech solutions (Mercado Ads).
MercadoLibre already benefits from a powerful network effect. Merchants naturally gravitate toward the most popular marketplace, which results in greater product selection. That incentivizes consumers to shop on the platform, creating a virtuous cycle.
However, adjacent services make MercadoLibre an even more compelling option for merchants and consumers while creating additional monetization opportunities for the company. Notably, management says it has the fastest and most extensive delivery network in its core geographies.
MercadoLibre reported solid financial results in the fourth quarter. Revenue increased 42% to $4.2 billion, representing 48% growth in the commerce segment and 38% in the fintech segment, both of which represent a sequential acceleration. GAAP net income was flat at $165 million, but that was due to one-time expenses related to tax disputes from 2014 and 2022. Excluding those one-time expenses, net income increased 166% year over year to $383 million.
Going forward, MercadoLibre has several tailwinds at its back as e-commerce, digital payments, and digital advertising become more prevalent across Latin America. Wall Street expects sales to increase at 19% annually over the next five years, but I think that estimate leaves room for upside, given the tremendous pace at which MercadoLibre is currently growing. Additionally, the company does not currently charge for fulfillment services, meaning it has a big monetization lever it has yet to pull.
In any case, the current valuation of 5.4 times sales looks very reasonable. Patient investors should feel comfortable buying a small position in this growth stock today.
