The S&P 500 dropped 19% last year, its worst performance since the Great Recession, and the benchmark index is still 18% off its high. But there is a silver lining for investors.
Since its inception in 1957, the S&P 500 has generally rebounded in the year following a decline. In fact, it has only declined in two or more consecutive years on two occasions, and the index has produced an average return of 13.5% in the year following a decline.
Past performance is never a guarantee of future returns, but history says the S&P 500 could rebound sharply this year. And even if that rebound fails to materialize, the benchmark index will undoubtedly recoup its losses at some point. Every past bear market has eventually been followed by a bull market. For that reason, investors should treat the current drawdown as an opportunity, and Shopify (SHOP) and MercadoLibre (MELI) are worth buying right now.
1. Shopify
Shopify invested aggressively in growth throughout the pandemic, to great effect. But the company was caught flatfooted when the tailwinds disappeared. The reopening of physical stores, coupled with the worst inflation in 40 years, resulted in a dramatic shift in consumer spending. That created a headwind to revenue growth.
Meanwhile, management kept its foot on the accelerator for too long, overspending on various growth initiatives. That cut deeply into profitability.
Collectively, those forces led to ugly financial results. Revenue increased 21% to $5.6 billion in 2022, a material deceleration from 57% growth in 2021, and non-GAAP (generally accepted accounting principles) earnings plunged 94% to $0.04 per diluted share. But economic headwinds are a temporary problem, and Shopify should have no problem reaccelerating growth when economic conditions improve.
The bull case is straightforward: Shopify is the leading e-commerce software vendor. It has a greater market presence and higher user satisfaction scores than any rival, according to research company G2.
Better yet, Shopify is actually the second-largest U.S. e-commerce company in terms of gross merchandise volume. Its merchants accounted for 10% of retail e-commerce sales in the U.S. last year, second only to Amazon. That puts Shopify in a good spot.
According to eMarketer, U.S. e-commerce sales will increase at 12% annually to reach $1.7 trillion by 2026, and global e-commerce sales will increase at 9% annually to reach $8.1 trillion during the same period.
But Shopify should be able to outpace both figures. Its platform gives merchants the flexibility to engage buyers and manage sales across physical and digital channels — something marketplace operators like Amazon cannot provide — and its strong market presence indicates that value proposition is resonating with merchants.
Currently, shares trade at 10.1 times sales, a bargain compared to the five-year average of 29.2 times sales. That’s why this stock is worth buying.
2. MercadoLibre
Argentina-based MercadoLibre is a commerce and fintech company that has followed the Amazon playbook to great effect in Latin America. Specifically, MercadoLibre played the part of pioneer when it launched the region’s first online marketplace in 1999.
The company has also reinforced its leadership with adjacent solutions like fulfillment services and ad tech tools, both of which make the marketplace more compelling for merchants. The commerce business continued to grow at a steady pace last year, despite the challenging economic environment. Gross merchandise volume increased 21% to $34.4 billion.
Meanwhile, MercadoLibre has also built a complementary fintech business that provides payment processing and digital wallet services through its Mercado Pago subsidiary, as well as merchant loans, consumer loans, and credit cards through its Mercado Crédito subsidiary. The fintech business is flourishing. Mercado Pago’s payment volume increased 60% last year, while Mercado Crédito’s credit portfolio increased 71%.
Putting the pieces together, MercadoLibre delivered a strong financial performance in 2022. Total revenue increased 49% to $10.5 billion, and GAAP net income increased fivefold to $9.53 per diluted share. The company also saw its commerce and fintech take rates improve as merchants and consumers adopted more services. Investors have good reason to believe that momentum will continue.
MercadoLibre runs the largest online commerce and payments ecosystem in Latin America, which itself ranked as the second-fastest-growing e-commerce market worldwide last year, implying equally strong growth in digital payments. But Latin America also has one of the fastest-growing internet penetration rates in the world, paving the way for continued adoption of online shopping and digital payments. MercadoLibre is perfectly positioned to benefit from that trend.
Currently, shares trade at 5.8 times sales, a discount compared to the five-year average of 12.5 times sales. That’s why this high-growth stock is a buy ahead of the next bull market.
— Trevor Jennewine
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Source: The Motley Fool