Growth stocks are facing significant amounts of turbulence at the moment. This is due to the soaring rates of inflation, which reached 7.5% in the US during January. Such a figure has not been reached for 40 years. High inflation is bad for growth stocks for two reasons. Firstly, it lowers the value of future cash flows, which is where these growing companies obtain large amounts of value. Secondly, it increases the likelihood of large interest rate rises in the future, which makes it far more expensive to borrow. These risks make it very important to be discerning when picking stocks. Here’s one I think is far too oversold and one which I believe remains too expensive.
A Latin American e-commerce giant
MercadoLibre (NASDAQ: MELI) has achieved significant growth over the past few years. Indeed, in 2020, the company recorded revenues of $3.97bn, which was a 73% increase from the previous year. It also expects revenues of over $7bn in 2021, which is similar growth to last year. This places the firm on a price-to-sales ratio of around eight, which is far lower than it has been in the past.
The company’s growth prospects are also strong. This is because MercadoLibre is expanding in both its e-commerce and fintech sectors. Both these sectors are unpenetrated in Latin America, and therefore there is certainly room to grow, especially as MercadoLibre is a market leader.
There are some risks though. For example, many of the jurisdictions where MercadoLibre operate in are seeing political instability. Argentina is one example, as the country has experienced mass hyperinflation over the past few years. This could potentially disrupt MercadoLibre’s business plan. Further, a significant amount of recent growth may have been due to the pandemic. As such, once consumers go back to physical stores, growth may slow.
But while these are risks, the recent dip in the MercadoLibre share price seems too good an opportunity to miss. Therefore, this is a growth stock I’ll continue to add to my portfolio.
A growth stock I’m avoiding
The recent dip in many growth stocks doesn’t mean that they are all bargains. In my opinion, Palantir (NYSE: PLTR), which makes software and analytics tools for the government and other companies, is one example.
But firstly, there are several positives with the company. For example, over the past year, it has managed to see strong revenue growth of around 40%, rising to around $1.5bn for 2021. It has also managed to add many new customers. For instance, in the third quarter, it added 32 new customers. This demonstrates that Palantir’s business plan is working.
But I’m concerned about the valuation of the company. In fact, even after the recent dip in the Palantir share price, it still has a price-to-sales ratio of 18. This is twice the P/S ratio of MercadoLibre, even though Palantir is seeing slower growth. It is also deeply unprofitable, meaning that high inflation is likely to have an ever more profound effect. Therefore, this is a stock I’m leaving on the sidelines.
