It has been difficult, to say the least, for investors over the past year. Nearly all sectors have been pushed off their all-time highs, and technology and e-commerce companies have been hit especially hard. While it might not seem like it, now is the best time to be buying high-quality companies, however. Many of the stocks that have been hammered are still executing on a fundamental level, which could allow their stock prices to shoot higher once the overwhelming fear about investing has dissipated.
Two of the best opportunities I see right now are MercadoLibre (MELI -1.82%) and PubMatic (PUBM -0.67%). Both companies are continuing to execute, and their futures look bright, despite macroeconomic uncertainty. Investors are scared about owning stocks right now, which leaves a great buying opportunity and it might be wise to put some money to work in these two companies.
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1. MercadoLibre
The Latin American e-commerce and payments giant has been crushed recently, falling nearly 64% off its all-time highs set in early 2021. This has brought its valuation down to just 4.5 times sales, which is the company’s lowest valuation since 2009. However, the company’s fundamental performance is looking stronger than ever. In Q1 2022 -- which it reported on May 5, 2022 -- the company’s total revenue soared 67% year over year on a foreign currency-neutral basis to $2.2 billion. The company also saw increasing adoption from Latin American citizens: The company’s unique active users jumped 16% year over year to 81 million.
There were highlights in Mercado Envios, its logistics service, and Pago, its payments platform. Envois saw improvements in delivery speeds, with 54% of MercadoLibre products being delivered on the same day or the next day. Nearly 80% of volumes were delivered by Envios within 48 hours, which increased five percentage points year over year.
Mercado Pago made impressive strides in customer usage. Off-platform total payment volume soared 139% year over year and represented 68% of total payment volume in Q1. In other words, consumers are not only using Pago to buy MercadoLibre products, but they are also using it elsewhere. This shows that Pago is becoming engrained into Latin American society, which is a great achievement for the long-term future of the company.
Because of this dominance around the region, MercadoLibre has started to become profitable. In Q1, the company reported a net income of $65 million, which soared from a loss of $34 million in the year-ago period. The company is still free cash flow negative, but this is because the company is seeing a significant ramp-up in its credit business. Mercado Credito saw its credit portfolio jump 319% year over year to $2.4 billion in Q1. What’s critical is that its non-performing loans as a percentage of its total loan portfolio only increased 1.6 percentage points year over year to 27.6% in Q1 -- a much slower growth rate than the company’s total portfolio expansion.
While the company’s loan portfolio adds some risk to the business, the company seems to be managing it well considering the slow rise in non-performing loans. Aside from that risk, the company seems to be firing on all cylinders, and given the company's rock-bottom price today, MercadoLibre looks severely undervalued.
2. PubMatic
PubMatic operates on the sell-side of the advertising technology (adtech) industry, helping those with ad inventory find the best bid from advertisers. PubMatic offers the ad space to thousands of potential advertisers, which boosts the chances of finding the highest bid for that ad space.
The digital ad market is ramping up fast because of the benefits it provides to advertisers compared to traditional advertising. Advertisers can target specific consumer demographics with digital ads, which cannot be done with billboards, for example. As a result, the global spend on digital ads is expected to soar from $514 billion in 2022 to $627 billion in 2024.
While not the industry leader, PubMatic is one of the top dogs in the space, processing 32.6 trillion impressions in Q1 alone. This helped Q1 revenue jump 25% year over year to $55 million. PubMatic is also seeing the benefits of advertisers spending more of their budget on digital ads: Its net retention rate increased from 130% in the year-ago period to 140% in the trailing twelve months.
PubMatic expects this success to continue, with revenue guidance projecting 25% year over year growth for the full year. Additionally, the company expects its profitability to improve. In Q1, the company’s adjusted EBITDA margin was 31%, but PubMatic expects this to shoot higher to 36% for the full year. This shows that PubMatic can take advantage of this rapid digital ad expansion on both the top and bottom lines.
At just 19 times earnings at 20 times free cash flow, PubMatic is looking like a steal today. The company is riding the tailwinds of a major industry, and it is predicted to gain market share considering it sees 25% top-line growth versus just 17% expected digital ad spend expansion in 2022. All of this combines for a potentially lucrative long-term investment, which is why I think PubMatic is a company worth owning today.
