A falling stock market and a constant barrage of negative headlines can wear investors down. It is difficult to feel any optimism. But now is precisely the time to remember that every bear market in the United States has been followed by a bull market. Buying high-quality businesses at today’s depressed prices can result in life-changing returns in the long run.
Two such companies that could potentially help deliver exceptional long-term returns are MercadoLibre (MELI -0.61%) and Airbnb (ABNB 1.98%). Let’s see why.
MercadoLibre: reaching escape speed
Defying difficult macroeconomic conditions, MercadoLibre recorded another outstanding result. In Q3 2022, its e-commerce business saw the number of unique buyers increase by around 10%. Gross merchandise volume (GMV) – the total monetary value of all transactions on its platform – increased by 32% in constant currency (18% in US dollars), accelerating from the 26% jump of the last quarter. The company maintained strong momentum in its top three key markets of Argentina, Brazil and Mexico, where GMV increased by 87%, 20% and 23%, respectively.
As online retail across the globe struggles amid a slowing global economy, MercadoLibre’s thoughtful approach and proactive investments in the key pillars of e-commerce – customer experience, technology , a wide range of product categories, smart promotions and its shipping and logistics network — make it a destination of choice for Latin American customers.
The increasing efficiency of its shipping network, Mercado Envios, allows packages to be shipped faster while reducing internal company costs. And the company’s advertising business, although in its infancy, is growing at a rapid pace. Ad revenue has grown from 0.9% of GMV a year ago to 1.3% in the last quarter.
Image source: Getty Images.
The performance of MercadoPago, the fintech business of MercadoLibre, an expanding one-stop-shop for financial services, was even more impressive. More sellers and buyers on MercadoLibre’s e-commerce platform, as well as dedicated MercadoPago users, are taking advantage of credit facilities and personal loans offered by the company.
MercadoPago’s asset management and savings features are also becoming popular. A record 40 million unique customers used MercadoPago’s services in the third quarter. MercadoPago has now added 10 million users in the last 12 months. The total volume of payments processed by MercadoPago in the third quarter increased by 76% in constant currency (54% in US dollars) to reach $32 billion.
Collectively, e-commerce and fintech companies are making the customer relationship with MercadoLibre very sticky, and the symbiotic relationship between the two business lines is driving the results. Third quarter revenue increased 61% in constant currency to $2.7 billion. The record of this impressive growth on top of the explosive growth of 73% a year ago is quite remarkable. There was also good news on the profitability front, as the company improved operational efficiency — Gross margin rose to 50.1% from 43.4% a year ago and operating margin fell from 8.6% to 11%.
MercadoLibre is achieve size and scale which make the competition very difficult for its rivals. With its growing product ecosystem and deepening customer relationships, the company continues to rack up strong results quarter after quarter. And despite this, the stock is trading near its 10-year low of 4.8 on a selling price base. Buying stocks now will likely make investors very happy over the next five years.
Airbnb: a cash-rich business model
Airbnb operates a marketplace where travelers can choose a place to stay from an unparalleled variety of accommodations and price points. The company has become a household name and has also provided a source of income for over 4 million hosts (households renting their homes to travelers) around the world.
Although at first glance Airbnb may appear to be a travel or lodging company, its business model is fundamentally different from traditional hotels and resorts in that it does not own, rent, maintain or exploits the properties available on its platform. This significantly reduces initial and ongoing capital expenditures and operating expenses for the business.
Plus, with its streamlined technology platform, the extra cost and time it takes to add a new listing or serve a new guest for Airbnb is almost negligible. In other words, Airbnb is growing at a significantly lower cost and at a faster pace compared to traditional hotels that rely on sustainable assets. And as more travelers use Airbnb, more hosts want to join the platform, creating a natural network effect.
Despite a difficult economic climate, consumers’ thirst for travel did not appear to abate in the third quarter of 2022, with the total number of nights and experiences booked for the quarter reaching nearly 100 million, up 25% from to a year ago. The average daily rate for stays also increased, jumping 5% to $155. With such high demand for Airbnb’s services, the last quarter turned out to be the company’s biggest quarter, with revenue hitting $2.9 billion, up 29% year-on-year. the other.
Thanks to its efficient business model, Airbnb increased its net income year over year by 46% to $1.2 billion and free movement of capital 80% to $960 million. Over the past 12 months, the company has generated an incredible $3.3 billion in free cash flow with a 40% margin, which means that for every $1 in revenue, the company generates $0.40 in free cash flow. available cash. While Airbnb is still a young public company, it shows all the signs of becoming a cash flow machine.
Despite consistent performance, Airbnb shares are trading near 10-year lows on measures such as price-to-sales ratio (9.1), price/earnings ratio (56) and the price to free cash flow ratio (43.3). Although the shares may seem slightly expensive, Airbnb’s global brand, scalable business model, network effects and future opportunities justify the premium demanded by the market. Take a small position in Airbnb today will likely pay handsome rewards in the long run.
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