Investors looking for companies that are well anchored in their sector and can run circles around the popular market barometer, the S&P500 (SNPINDEX: ^GSPC) index, are in the right place.
The stock market has historically returned about 10% per year. If you want to beat the average stock, you need to look for solid companies that grow earnings per share above average. Here are two growth stocks that have outperformed the S&P 500 over the past five years and could do so again.
Amazon (NASDAQ: AMZN) is a large company with a market cap of $2.4 trillion, but it has multiple levers to drive the growth needed to outperform the market.
On a trailing twelve-month basis during the third quarter, operating income increased 130% to $60 billion. Much of this was due to cost savings on the retail side of the business. Amazon’s ability to show significant profit growth while investing in several initiatives – including artificial intelligence (AI) for cloud and retail customers, content for Prime Video and new fulfillment centers – shows why it is a company that is built to last a long time.
The company’s strong growth in non-retail services, which now make up the bulk of its $620 billion in annual revenue, could spur further profit gains to propel the stock higher. Its advertising services generated $53 billion in revenue last year, with revenue rising 19% year-over-year in the third quarter, excluding currency fluctuations.
“Even with this growth, it’s important to realize that we’re just scratching the surface of what’s possible in our video advertising space,” CEO Andy Jassy said during the company’s second-quarter earnings call.
But the bulk of Amazon’s operating profit comes from its cloud computing business, Amazon Web Services, where the company still has plenty of opportunity, as evidenced by its 19% year-over-year revenue increase last quarter.
The stock trades at a high price-to-earnings ratio of 37 based on 2025 earnings estimates. But that seems reasonable given the growth of high-margin revenue streams that can expand margins. Analysts expect the company to achieve 23% annualized earnings growth in the coming years, which should pave the way for market-beating returns.
MercadoLibre (NASDAQ: MELI) provides fintech services and an online marketplace for consumers across Latin America. Ultimately, the country benefits from the tailwinds of the Latin American e-commerce market, which offers a long runway for growth.
MercadoLibre has consistently reported very high growth rates, but e-commerce penetration remains low in Latin America. The market’s unique active buyers grew 21% year-over-year, helping drive a 35% year-over-year revenue increase.
The company continues to expand its fulfillment centers and management plans to more than double capacity in Brazil by the end of 2025. This will increase same-day delivery coverage by 40%, which should encourage higher order frequency from customers.
Despite the company’s continued high growth, its shares are trading at the lowest price-to-sales (P/S) ratio in 15 years. The stock’s P/S multiple currently stands at 5.29 – below its past average of 10. At this valuation, investors can expect returns to be more or less consistent with the company’s underlying growth.
The stock has doubled in the last two years and continues to trade around the same P/S multiple. With management also starting to focus on increasing the company’s profit margin, there are good reasons to believe the company is still undervalued. Analysts expect the company to grow earnings per share 30% annually in the coming years, which should pave the way for market-crushing returns for MercadoLibre shareholders.
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*Stock Advisor returns December 9, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard has positions in MercadoLibre. The Motley Fool holds and recommends positions in Amazon and MercadoLibre. The Motley Fool has a disclosure policy.
Two growth stocks that could outperform the S&P 500 through 2030 were originally published by The Motley Fool
