Businesses with lots of ‘optionality’ can make for exciting investments. Optionality is simply jargon for having multiple avenues of ongoing or potential growth. In other words, different ways to win. Here are two growth stocks I think fit the bill and are worth considering.
Established tech giant
Amazon (NASDAQ:AMZN) is a classic case study in building optionality. It started out as an online book seller, before morphing into the ‘everything store’ by allowing third parties to sell on its platform.
Today, Amazon is the e-commerce behemoth we all know, as well as a global leader in cloud computing through AWS. Then there’s Prime, Alexa, Twitch, and developing projects like self-driving cars, delivery robots and drones, an internet satellite constellation, and more.
Amazon is also quickly becoming a digital advertising giant. In Q2, ad revenue hit nearly $16bn, up 23% year on year. This income has far higher margins than retail sales, and should noticeably boost Amazon’s profitability over time.
However, all these things rolled into one does invite regulatory scrutiny, especially in Europe. So antitrust action could force tighter rules or even a break-up one day.
Nevertheless, with the stock trading at a fairly reasonable 34 times forward earnings, I think Amazon looks attractive. Especially when the long-term growth opportunities in higher-margin digital advertising and AI cloud computing appear substantial.
Emerging tech giant
Next is a mini Amazon in the making: MercadoLibre (NASDAQ: MELI). Indeed, it’s often called the ‘Amazon of Latin America’.
That’s because the company also has a large e-commerce marketplace and extensive logistics network, as well as a fast-growing advertising business and Prime-like subscription service.
But MercadoLibre’s optionality extends to fintech offerings, namely Mercado Pago (digital payments, savings and investment features) and Mercado Crédito (loans to both merchants and unbanked consumers).
These operations spin into each other like a well-oiled flywheel across 18 nations. In Q2, net revenue rose 34% to $6.8bn, with gross merchandise volume growth in all markets. Mexico performed strongly while Argentina returned to growth after years of economic turbulence.
Of course, it’s important to acknowledge that Latin America isn’t always the safest sandbox to play in. Wild currency swings, hyperinflation, and political instability in core markets can impact profitability. These are unavoidable risks moving forward here.
However, this is also a region where traditional banks have often treated customers poorly, or left them behind completely. MercadoLibre already has 68m monthly active fintech users. But to fully capitalise on the opportunity, it’s aiming to become a fully licensed digital bank.
This would allow it to grow the loan book more aggressively and at a potentially lower cost, as well as offer a wider range of financial products. And while this increases the risk of rising bad loans, it also opens up a massive long-term growth opportunity.
In e-commerce, the firm is slashing shipping costs for millions of consumers, which is putting pressure on margins. But over time, this should keep shoppers loyal and deepen the company’s competitive advantages. And like Amazon, digital advertising should help boost profitability.
The stock is trading at 36 times next year’s forecast earnings. Given that the company is still decisively prioritising growth over profits, that’s by no means outrageous.
Overall, MercadoLibre strikes me as a compelling long-term play on the digitisation of Latin America.
