Investing in the S&P500 through an exchange-traded fund (ETF) that tracks this is an excellent idea for long-term investors. The index has delivered solid returns overall. We have every reason to believe this will continue for some time.
But what about investing in stocks that can perform even better? That’s what MercadoLibre (NASDAQ: MELI) And Netflix (NASDAQ:NFLX) have done this year. That is of course no guarantee that they will do so in the future, but we have good reason to expect that this will be the case.
Let’s discuss some of those reasons.
1. MercadoLibre
MercadoLibre, the largest e-commerce player in Latin America, has the qualities to become a long-term winner. The company’s position is so strong that in fact Amazon has not been able to compete. Any time a company can dominate a market, especially in the broad e-commerce category, while competing against Amazon, that company is probably doing something right.
However, it’s worth pointing out that MercadoLibre isn’t just an Amazon copycat. The company’s operations span multiple segments, including fintech, logistics and a service that allows merchants to open online stores. Which brings us to another important point: MercadoLibre’s extensive and complementary range of services gives it a solid competitive advantage.
The company demonstrably benefits from the network effect (the value of its e-commerce platform increases as its use increases) and from switching costs, as merchants within the ecosystem may experience business disruption if they decide to switch. A strong moat is essential for a company to achieve above-average returns over long periods of time. MercadoLibre is not missing in this category.
Moreover, the company achieves profitable growth. Take a look at MercadoLibre’s second quarter results. Revenue rose 42% year over year to $5.1 billion. The company’s net profit of $531 million rose nearly 103% compared to the same period last year. MercadoLibre’s statistics went in the right direction across the board. The company’s strong financial results contributed to this year’s performance.
Finally, MercadoLibre should continue to benefit from e-commerce growth as retail transactions move to online channels. The incentive to do business with people and companies all over the world – as opposed to companies limited to a small geographic area – is too strong. Therefore, e-commerce is on a long-term growth path. Few players are better positioned to benefit from this than MercadoLibre. It’s not too late to buy the stock, despite strong returns this year.
2.Netflix
Netflix was a pioneer in streaming, but the company now faces more competition than ever. There are dozens of streaming services, some trying to appeal to a broad audience and others focusing on specific categories such as sports.
Still, several players dominate the field, and it’s not surprising that Netflix is one of them. The company has found a way to perform well despite the changing dynamics. It introduced a cheaper, ad-supported subscription option, and it cracked down on password sharing by making primary account holders pay for sub-accounts owned by people outside their households.
Partly due to these changes, Netflix’s financial results have recovered from the slump of two years ago. In the second quarter, Netflix’s revenue rose 17% year over year to $9.6 billion. Net profit rose 44% year over year to $2.1 billion. Netflix’s paid memberships reached 277.65 million at the end of the period, a growth of 16.5% compared to the previous year’s quarter.
Netflix’s ecosystem gives it its competitive advantage. The company collects data on viewer habits and what viewers like and don’t like, and guides its content production efforts based on its findings. In other words, Netflix’s platform benefits from the network effect. More subscribers mean more data, better content production decisions, more viewing hours, and ultimately even more subscribers. That is important for the future of the company.
There is still plenty of room to grow in the streaming industry. Netflix wants to replace cable, which has lost market share, but is far from gone. In August, streaming captured 41% of television viewing time in the US. In most other places, that number is probably much lower. So Netflix still has enormous opportunities ahead. The company could earn outsized returns as it makes progress in its addressable market.
Don’t miss this second chance at a potentially lucrative opportunity
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
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Amazon: If you had invested $1,000 when we doubled in 2010, you would have $21,266!*
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Apple: If you had invested $1,000 when we doubled in 2008, you would have $43,047!*
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Netflix: If you had invested $1,000 when we doubled in 2004, you would have $389,794!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns October 7, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny has positions in Amazon. The Motley Fool holds positions in and recommends Amazon, MercadoLibre, and Netflix. The Motley Fool has a disclosure policy.
2 Monster Stocks Crushing the S&P 500 This Year was originally published by The Motley Fool
