That Nasdaq Composite is currently 23.8% below its high, well above the 20% threshold that defines a bear market. Losses of this magnitude can be unsettling, especially for novice investors, but it’s important to remember that downturns are ultimately temporary. Macro headwinds have dragged stock prices down, but those headwinds will eventually dissipate and the market will recover.
That doesn’t mean every company will experience a rebound. But quality stocks like Zscaler (ZS 2.98%) and MercadoLibre (MELI 3.19%) — 49% and 51% off their highs, respectively — are well positioned to rebound if market conditions improve. In the meantime, investors have an opportunity to buy both stocks at a discount.
Because of this, you’ll regret missing the opportunity to buy these two stocks during the dip.
1. Zscaler: The largest cloud for network security
Zscaler specializes in zero trust network security, cloud workload protection, and digital experience monitoring. Its platform — known as the Secure Access Service Edge (SASE) — relies on artificial intelligence to inspect network traffic and enforce security policies in the cloud, eliminating the need for costly on-premises devices. It securely connects users to applications and data across public clouds and private data centers from any device or location.
Spanning more than 150 data centers, Zscaler SASE inspects 250 billion requests daily, capturing trillions of security signals. This makes it the largest network security cloud in the world. The resulting data advantage theoretically means it offers better protection against threats than any other provider. Basically a research company gardener has recognized Zscaler as an industry leader for eleven consecutive years.
Long-term trends such as software-as-a-service and other forms of cloud computing are rendering traditional network security solutions ineffective and inefficient. It no longer makes sense to route traffic through a central enterprise data center simply because applications and data often reside in the cloud. In a broader sense, cybersecurity is not an optional expense. Businesses need to protect their sensitive applications and data.
Zscaler’s leadership continued to drive strong demand in the fourth quarter of fiscal 2022 (ended July 31). Total customers grew 20% year over year to 6,700, and average customers increased their spend by more than 25%. In turn, quarterly revenue rose 61% year over year to $318 million and free cash flow (FCF) rose 170% to $75 million.
Looking ahead, investors have good reason to believe that Zscaler can maintain this momentum. Management puts the addressable market at $72 billion, and Zscaler should benefit as more companies adopt cloud computing and remote work.
Shares are currently trading at 27.1 times sales. That’s certainly not cheap, but it’s a discount from the three-year average of 37.2 times revenue. And given Zscaler’s rapid growth and sizeable market opportunity, that seems like a reasonable price.
2. MercadoLibre: The e-commerce leader in Latin America
MercadoLibre operates the most popular online commerce ecosystem in Latin America and its fintech platform (Mercado Pago) is the third most popular digital wallet in the region. The company bolstered its strong market presence in both ecosystems with a robust offering of related products.
MercadoLibre provides merchants with fulfillment and digital advertising services, simplifying logistics and helping them attract buyers. In fact, its logistics business (Mercado Envios) handled 91% of shipping volume in the second quarter, and 80% of that volume arrived within 48 hours. On the fintech side, the lending business (Mercado Credito) offers merchant working capital loans, consumer personal loans, and credit cards. Mercado Credito’s loan portfolio grew 230% in the second quarter.
These value-added services make MercadoLibre’s trading and fintech ecosystems more sticky, which translates into pricing power. Case in point: the commerce take rate (trade turnover as a percentage of gross merchandise volume) increased from 15.7% in H1 2021 to 16.5% in H1 2022. And the fintech take rate (fintech turnover as a percentage). of the total payment volume) rose from 3.2% to 3.9%.
Unsurprisingly, this led to impressive financial results. In the second quarter, revenue rose 53% to $2.6 billion and earnings rose 77% to $2.43 per diluted share. And shareholders have good reason to believe the momentum will continue. Internet penetration is increasing rapidly in Latin America, fueling the adoption of online shopping and digital payments.
In fact, Argentina, Brazil, and Mexico account for the bulk of MercadoLibre’s total sales, and all three countries are among the top 10 fastest growing e-commerce markets in the world. More broadly, Latin America itself is the second fastest growing e-commerce market in the world, with online retail sales projected to grow 19% to $167 billion in 2022, according to eMarketer.
Shares are currently trading at a bargain 5.5 times sales — a steal compared to the three-year average of 13.7 times sales. That’s why this growth stock is a Buy.
