Investors tend to get excited when a company does a stock split. This may seem counterintuitive because a stock split has no direct impact on fundamentals like revenue or valuation, but there is a thread of logic in this interaction. A stock split is only necessary after the share price has risen significantly, which itself indicates strong underlying activity.
With that in mind, Costco wholesale (it costs 0.16%) And MercadoLibre (Millie 1.89%) They are a prime candidate for a stock split since their shares are currently trading at $555 and $1,223, respectively. But both stocks are worth buying even if that doesn’t happen. Here’s why.
1. Costco Wholesale
Membership-based retailer Costco reported dismal financial results last quarter as the broader retail industry continued to struggle with high inflation. Revenue rose just 2% to $53.6 billion, reflecting a 4.8% increase in store traffic offset by a 4.3% decrease in average ticket price. Earnings under Generally Accepted Accounting Principles (GAAP) fell 4% to $2.93 per diluted share. However, growth should accelerate as the economy improves.
The investment thesis focuses on scale and brand authority. Costco is the third largest retailer in the world, and the company has developed a reputation for selling quality goods at competitive prices due to cost advantages arising from its size and business model.
It has added paying members at 6% annually over the past five years, and its membership renewal rate was 92.6% last quarter. This insinuates brand authority and consumer loyalty, and investors can turn these qualities into operational expertise.
For example, Costco carries 4,000 SKUs on its shelves, far fewer than the 30,000 SKUs found in most supermarkets, forcing suppliers to compete in price over limited shelf space.
Costco will also make a product through its own Kirkland Signature label when the brand is too expensive. These generic products typically sell for 20% less, but earn higher margins.
Here’s the bottom line: US retail sales have grown 5% annually over the past decade, and a similar growth trajectory is likely in the next decade. But Costco has historically grown faster than the industry average because of its strong competitive position. In fact, its revenue has increased 8.4% annually over the past decade, and investors can expect similar results in the future.
With that in mind, the stock currently trades at 1.1 times sales, which is a slight premium over the three-year average of 1 times sales, but a reasonable price to pay for a quality business like Costco. Investors should buy a small position in this retail stock today, whether or not the company does a stock split in the future.
2. MercadoLibre
MercadoLibre reported exceptional first-quarter financial results despite facing economic headwinds such as rising inflation and unfavorable foreign exchange rates. Revenue increased 33% to $3 billion, reflecting strong growth in the trading and financial technology sectors. GAAP earnings increased 205% to $3.97 per diluted share, as improved efficiencies in marketing and logistics contributed to a 370 basis point expansion in profit margin.
The company should be able to maintain this momentum in the coming years. MercadoLibre operates the largest e-commerce and digital payments ecosystem in Latin America. Its market receives nearly four times more visitors than its closest competitor, and its market share is expected to reach 21.6% in 2023, up 70 basis points from 2022.
This scale supports a strong network effect. Merchants are strongly motivated to participate in the market due to its popularity among consumers, and each new merchant makes the market a more compelling shopping destination for consumers.
MercadoLibre’s network-impact supercharged with the adjoining services of payment processing, finance, logistics, and digital advertising. These products make their marketplace a more convenient option for merchants.
It takes a similar path with consumer finance. Its subsidiary, Mercado Pago, is one of the most popular digital wallets in Latin America, and the company is cementing that popularity with adjoining products such as asset management, credit cards, and consumer loans.
Here’s the bottom line: Online retail sales in Latin America are expected to increase 14% annually through 2027, and digital payments volume is expected to increase 15% annually over the same time period, according to Statista.
MercadoLibre has a strong presence in both markets, and has another big opportunity in digital advertising, so its revenue should grow much faster than the industry average for the foreseeable future.
However, the shares are currently trading at 5.4 times sales, which is a bargain compared to the three-year average of 11.3. Investors should jump at this opportunity to buy this growth stock, whether or not the company does a stock split in the future.
