The market indexes continued to soar in 2024, but there are still plenty of excellent companies selling at attractive valuations. With earnings multiples for top growth stocks starting to look frothy, 2025 might be the year to start adding more value stocks to your portfolio. Here are two leading e-commerce companies that could double your money in five years.
1. Alibaba
Alibaba(NYSE: BABA) has fallen well off its highs over the last few years but is trading at a bargain price. Analysts expect this leading e-commerce and cloud computing provider in China to grow earnings at 15% per year over the long term, yet the stock trades at less than 10 times 2025 earnings estimates.
The earnings growth alone would be enough to double the share price in five years. But there's also the potential for investors to bid the share price up to a higher price-to-earnings multiple. The combination of earnings growth and expansion in the earnings multiple could set the stage for outstanding returns.
There are a two factors contributing to Alibaba's low valuation. China's economy has struggled over the last few years, and Alibaba has also wrestled with emerging competition from PDD Holdings. The economy will always have ups and downs.
As for competition, Alibaba's recent growth in monthly users shows that its scale and market reach might be greatly underestimated. Alibaba's commerce revenue was up only 1% year over year in the September-ending quarter, but monthly active consumers on its Taobao and Tmall marketplaces hit a new all-time high. This is a very profitable business that should see higher growth when the economy is stronger.
Meanwhile, Alibaba Cloud is benefiting from growing demand for artificial intelligence (AI). Cloud revenue accelerated to 7% year over year last quarter. Its AI-related product revenue has grown at triple-digit rates over the last five quarters.
While Alibaba's adjusted net income declined 9% over the year-ago quarter, investors can count on the business improving this performance over the next few years as management focuses on improving efficiency. For example, management has been focused on downsizing non-core assets to focus on its core businesses. It recently announced the sale of its equity interest in Sun Art to DCP Capital for $1.5 billion.
It's also great to see Alibaba buying back shares and paying regular dividends. The company returned $4.1 billion in dividends and $4.3 billion in share repurchases in Q3. The buybacks indicate that management sees solid value in the shares.
2. MercadoLibre
The Latin American e-commerce market offers a lot of opportunity for growth investors. MercadoLibre(NASDAQ: MELI) is the dominant e-commerce company that offers a range of services like mobile payments, shipping, credit, and an online marketplace.
Revenue continues to grow at high rates, but management's efforts to improve margins could lead to annualized earnings growth of 30% per year based on the current Wall Street consensus. This is enough growth to support the stock trading at 39 times expected earnings.
Another way to value the stock is on a price-to-sales (P/S) basis. The stock's recent P/S multiple of 4.9 is less than half its 10-year average multiple of 10.7.
MercadoLibre continues to widen its competitive moat, improve margins, and grow revenue at similar rates as before the pandemic. The number of unique buyers on Mercado's marketplace platform grew 21% year over year last quarter to over 60 million. The company will likely continue growing this number, given that there are 650 million people across Latin America.
MercadoLibre reported an 11% year-over-year increase in net income last quarter, as management stepped up spending in technology to improve the user experience. Profits will be lumpy, but the trend in margins has been pointing upward in recent years.
Investors should expect margins to continue improving, as the company expands fulfillment centers, which will drive incremental revenue, grow scale, and lower delivery costs from shorter transit times.
Additionally, the company's advertising revenue grew 37% year over year, providing another profitable revenue stream to boost margins over the long term.
Given its leading position in a growing e-commerce market, investors have a good chance of doubling their money and earning handsome gains from MercadoLibre stock over the next five years.
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John Ballard has positions in MercadoLibre. The Motley Fool has positions in and recommends MercadoLibre. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
