Some investors use stock splits as a roundabout way of finding good companies. The logic is simple enough: Forward stock splits are only necessary after substantial and sustained share price appreciation, which typically coincides with consistently strong financial results.
For instance, Nvidia (NVDA 0.97%) and MercadoLibre (MELI 4.15%) returned 1,160% and 376%, respectively, over the last five years. That price appreciation qualifies the companies as stock-split candidates but also reflects robust sales and earnings growth on a regular basis.
More importantly, Nvidia and MercadoLibre are well positioned to maintain that momentum in the future. That means both stocks are worth buying today whether they split or not.
The bull case for Nvidia centers on its dominance in graphics and accelerated computing. The company invented the graphics processing unit (GPU), a chip that brought revolutionary visual effects to video games about two decades back. But GPUs have since become critical in accelerating complex data center workloads like artificial intelligence (AI). Today, Nvidia holds 95% market share in workstation graphics processors and 80% to 95% market share in machine learning processors, according to analysts.
Nvidia has further distinguished itself with its full-stack computing strategy. The company couples its GPUs with adjacent hardware, like central processing units (CPUs) and high-performance networking equipment. It has also solidified its prominence in AI and 3D graphics with cloud-based software and services tailored to each end market.
DGX Cloud provides access to supercomputing infrastructure and software geared toward AI application development. It also includes frameworks that aid in the creation of industry-specific solutions, such as route-optimization software in logistics and product recommender systems in retail. Similarly, Omniverse Cloud provides access to infrastructure and software geared toward 3D application development and physically accurate simulation, which is useful in training and testing AI models for autonomous machines.
Nvidia reported phenomenal financial results in the third quarter. Revenue soared 206% to $18 billion on strong growth in the data center and professional visualization (workstation graphics) segments, and non-generally accepted accounting principles (non-GAAP) net income increased sixfold to $10 billion.
Looking ahead, Grand View Research says the AI market could grow at 37% annually through 2030. Nvidia should be a major beneficiary of that tailwind. Indeed, Morningstar expects the company to grow sales at 22% annually over the next decade. In that context, the current valuation of 27 times sales looks relatively reasonable, though certainly not cheap.
Investors should start with a very small position in Nvidia stock today, then dollar-cost-average to build a bigger position over time.
The bull case for MercadoLibre centers on its strong presence in Latin America’s e-commerce, financial services, and digital advertising markets. According to consultancy McKinsey, the region is primed for robust economic expansion driven by the adoption of digital technologies.
MercadoLibre is ideally positioned to benefit from that digitization because it operates Latin America’s largest online commerce and fintech ecosystem. In fact, its marketplace receives nearly 4 times as many visitors as the next-closest digital shopping destination, and it will account for an estimated 21.6% of online retail sales this year, up from 20.9% last year, according to eMarketer.
That popularity gives rise to a powerful network effect. Merchants and consumers naturally gravitate toward the most popular marketplace, creating a virtuous cycle in which each group reinforces the behavior of the other. MercadoLibre further cements its leadership by providing adjacent services for logistics and digital advertising, making its marketplace even more compelling for merchants.
MercadoLibre reported solid financial results in the third quarter. Total revenue increased 69% to $3.8 billion, as sales in the commerce and fintech segments climbed 45% and 33%, respectively. Additionally, GAAP net income soared 178% to $359 million due in part to improved underwriting in the fintech segment.
Going forward, MercadoLibre has three powerful tailwinds at its back. Retail e-commerce sales in Latin America are forecasted to increase 12% annually through 2027, implying strong momentum in digital payments as well. And Latin America currently ranks among the fastest-growing digital ad markets worldwide. MercadoLibre has a strong presence in all three markets.
With that in mind, Morgan Stanley expects the company to grow revenue at 20% annually through 2030. That forecast makes its current valuation of 5.9 times sales look quite reasonable, especially when the three-year average is 9.6 times sales. Patient investors should have no reservations about buying a small position in this growth stock today.