Investing your money in the right growth stocks can help you earn superior returns to the market averages. The safest way to proceed is to focus on industry-leading companies that still have a long runway of growth ahead.
If you have an extra $5,000 you don't need for living expenses or reducing debt, Amazon (AMZN -2.62%) and MercadoLibre (MELI -3.09%) are promising growth stocks to bet on right now. Here's why they are poised for above-average returns.
Amazon has delivered extraordinary returns over the last few decades. It has captured the largest share of e-commerce, with double the online sales of Walmart in the U.S., according to Statista. Amazon also has fast-growing revenue streams from cloud computing and other non-retail services. The stock has an expensive-looking market cap of $2.3 trillion, but it still looks undervalued based on the company's booming profitability.
Amazon saw a massive increase in operating profit last year from lowering costs in its retail business. Amazon is seeing margins improve as it ships more volume through its own logistics network and places more inventory closer to customers to shorten delivery time.
Operating income grew from $37 billion in 2023 to $69 billion in 2024, and there is still more room to lower costs and improve margins. Amazon could see substantial margin improvement over time from integrating robotics in fulfillment centers to automate tasks.
Amazon could also use the improved efficiency to keep margins steady at current levels and pass on the savings to customers with lower prices. Either way, improving the cost structure is creating a stronger business that will increase the intrinsic value of the company.
Overall, the investments Amazon is making in artificial intelligence (AI), including technology to support demand in its growing cloud services business, could yield significant value for shareholders over the next decade. With analysts expecting the company to grow earnings at an annualized rate of 21% in the coming years, the stock could double in five years.
The stock's valuation looks particularly attractive based on Amazon's cash from operations (CFO) per share, where the price-to-CFO multiple is currently 20, below its previous 10-year average of 27, which indicates it is undervalued.
MercadoLibre is driving major change for Latin American consumers in a similar way that Amazon changed the way people shop in the U.S. MercadoLibre has built a powerful ecosystem of commerce and fintech solutions that continues to drive impressive rates of growth.
The company is expanding in a region with a large population of more than 650 million people. Unique buyers in MercadoLibre's marketplace business grew 24% year over year to reach 67 million in the fourth quarter. That rate of growth accelerated over the last year from 18% in the fourth quarter of 2023, suggesting it isn't close to reaching market saturation.
During the recent Q4 earnings call, CFO Martin de los Santos summed up why there's more opportunity ahead:
The pillars of our long-term growth strategy are based on the relatively low penetration of e-commerce in our region, a huge opportunity to offer better financial products to large segments of the population that have been underserved by traditional banks, and the digitalization of cash for merchants and individuals.
The company continues to invest in opening more fulfillment centers to grow its marketplace business while offering credit cards and other services to achieve its long-term goal of becoming the largest digital bank in Latin America. Keep in mind that MercadoLibre primarily operates in just three countries: Brazil, Mexico, and Argentina, which leaves significant potential in neighboring markets.
Given that revenue grew 56% year over year in Q4 on a currency-neutral basis, you would think the stock would be selling at a huge premium, but its price-to-sales (P/S) multiple is currently 5.4, far below MercadoLibre's previous 10-year average sales multiple of 10.3.
As the company continues to expand, the shares should deliver awesome returns. There's the added potential for the stock to gradually move back to its previous P/S trading range and fuel incredible returns in the next five years.
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