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Consumer growth names may seem like the last place one might want to invest in the current environment. Massive growth during the pandemic gave way to slowdowns and huge stock declines in 2022.
That swoon may not immediately lead to a comeback in 2023. Nonetheless, many of these consumer growth stocks sell at a considerable discount, possibly leading to opportunities in high-quality names such as Shopify (SHOP -1.11%) and MercadoLibre (MELI -2.31%).
When it comes to e-commerce platforms, online sellers have numerous choices. However, Shopify is emerging as a winner. It has already become the most popular platform in the U.S., and globally, it lags only WordPress plug-in WooCommerce.
But why is it emerging? Indeed, it gained a competitive advantage by emphasizing transaction speed and the ability to customize platforms.
But the most likely reason is a vast ecosystem that makes the platform a one-stop shop for all things e-commerce. Through Shopify, sellers can manage tasks such as tracking payments, raising capital, managing inventory, and even fulfilling orders. This allows it to transcend most of its peers, who limit themselves to providing software.
The post-lockdown deceleration in e-commerce activity slowed but did not stop the growth of Shopify. The company generated $3.9 billion in revenue in the first three quarters of 2022. That was a 20% increase compared with the same period in 2021, but lagged the 57% revenue growth rate in 2021.
Shopify also lost $2.8 billion during the first nine months of 2022 after turning a profit in the same time frame in 2021. Unrealized investment losses and rising operating expenses weighed on the bottom line.
Such a turnabout and a bear market contributed to an 80% drop in the stock price from its all-time high. Still, the price-to-sales ratio is at a multiyear low of 8, and given its continuing growth and its growing popularity among online sellers, Shopify looks increasingly like a potential breakout stock in 2023.
One can forgive U.S. investors for not taking an interest in MercadoLibre, which operates exclusively in Latin America. This region is sometimes prone to high inflation and political instability, and with hundreds of millions of cash-based customers, e-commerce may seem unworkable.
However, MercadoLibre not only thrives despite its region’s challenges but also because of them. Indeed, MercadoLibre facilitates e-commerce, but this goes far beyond selling.
Its fintech arm, Mercado Pago, offers cash cards, QR codes, and other services that enable cash-based customers to buy online. Initially designed to facilitate buying on MercadoLibre’s platform, the service was so successful that the company later opened it to customers not buying from MercadoLibre.
The company also established Mercado Envios to help online sellers with storage, packaging, and delivery. Since rapid delivery was not common in the region, Mercado Envios built a competitive advantage by offering same-day or next-day delivery in many cases.
Despite a slowdown, these services allowed MercadoLibre to generate $7.5 billion in the first nine months of 2022. This increased by 53% versus the same time frame in 2021. Also, MercadoLibre turned profitable last year, earning a $317 million profit in the first three quarters of 2022.
Unfortunately, that performance did not insulate it from the bear market, and it has dropped by more than 55% from its all-time high. Still, its P/S ratio of just above 4 is the lowest level since the financial crisis. That could indicate that now is the time to add shares in the internet and direct marketing retail stock.
Will Healy has positions in MercadoLibre and Shopify. The Motley Fool has positions in and recommends MercadoLibre and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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