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Potential Stock Splits in 2024: 2 Magnificent Growth Stocks Up 575% and 780% in 7 Years to Buy Now and Hold Long-Term

In Business
April 06, 2024

In January, I wrote that Chipotle Mexican Grill could split its stock in 2024. Sure enough, the company approved a 50-for-1 split two months later. Shares have risen 2% since the announcement, possibly because investors are excited. Stock splits make shares more affordable, but they can also spotlight fundamentally strong companies.

I say that because stock splits are only necessary after significant price appreciation, which rarely happens to companies that lack a competitive advantage. For instance, Chipotle has built brand authority by focusing on fresh ingredients and responsibly raised meat. That has translated into strong financial results and share price appreciation. Revenue increased at 18% annually over the last three years, and the stock more than doubled in value.

However, the stock split itself is irrelevant. Substantial and sustained price appreciation is what tells investors the company is doing something right.

ServiceNow (NYSE: NOW) and MercadoLibre (NASDAQ: MELI) have seen their shares increase 780% and 575%, respectively, over the last seven years. Those gains qualify the companies as stock split candidates, but both stocks are worth buying even if that doesn’t happen.

1. ServiceNow

ServiceNow specializes in workflow digitization and automation. Its platform targets four categories: technology workflows like IT service management, customer workflows like customer service management, employee workflows like human resources, and creator workflows like application development. In targeting those categories, ServiceNow helps businesses operate more efficiently by replacing outmoded and manual systems with integrated software that streamlines work across departments.

ServiceNow has a competitive advantage in proprietary technology, as evidenced by its strong presence in several software markets. The company is best known for its IT service management software, but it also leads the markets for IT operations management and artificial intelligence (AI) for IT operations software, according to consultancy Gartner. ServiceNow is also a recognized leader in customer service solutions and digital process automation, according to Forrester Research.

ServiceNow reported solid fourth-quarter financial results, beating expectations on the top and bottom lines. Total revenue increased 26% to $2.4 billion, marking the fourth consecutive quarter in which revenue has accelerated sequentially. Non-GAAP (adjusted) net income jumped 36% to $3.11 per diluted share. The company also reported a renewal rate of 99% in the fourth quarter, up from 98% in the previous year. CEO Bill McDermott attributed the strong quarter to resilient demand for digital transformation supercharged by interest in artificial intelligence.

ServiceNow has incorporated artificial intelligence capabilities into its software for years, such as predictive insights, virtual agents, and intelligent search. The company has also introduced generative AI tools that create content, summarize information, and automate tasks. Given its footprint — 85% of Fortune 500 companies use at least one ServiceNow product — the company sees itself as “uniquely positioned to bring the full potential of generative AI to the enterprise.”

Wall Street expects the company to grow sales at 20% annually over the next five years. That consensus estimate makes its current valuation of 17.4 times sales seem tolerable. Investors with a five-year time horizon should feel comfortable buying a small position in ServiceNow today, whether or not the company announces a stock split.

2. MercadoLibre

MercadoLibre is often described as the “Amazon of Latin America,” which is a nod not only to its e-commerce leadership, but also to the ecosystem of supporting services that strengthen its economic moat. MercadoLibre runs the most-visited online marketplace in Latin America, and the largest online marketplace as measured by sales. In fact, its market share exceeds that of the next five competitors combined, according to Morgan Stanley.

That scale is a competitive advantage. It creates a particularly powerful network effect because merchants naturally gravitate toward the platform most popular with consumers, and vice versa. But MercadoLibre has constructed an ecosystem of supporting services that deepens the moat around its business. Specifically, it provides solutions for payments, financing, logistics, and advertising, and it has a strong presence in those markets. For instance, MercadoLibre operates the fastest and most extensive delivery network in its core geographies.

MercadoLibre reported solid financial results in the fourth quarter, something investors have come to expect from the company. Revenue rose 42% to $4.2 billion, reflecting 48% growth in commerce sales and 38% growth in fintech sales, a sequential acceleration in both cases. And while generally accepted accounting principles (GAAP) net income was flat at $165 million, that was due to one-time expenses related to tax disputes. Excluding those expenses, net income soared 166% to $383 million.

Going forward, ongoing digitization of the Latin American economy should be a tailwind for the company. To quote eMarketer, “Latin America has transformed into a flourishing hub of digital innovation thanks to widespread internet access.” MercadoLibre is ideally positioned to benefit as more commerce, payments, and advertising take place through digital channels.

With that in mind, Wall Street expects the company to grow sales at 20% annually over the next five years. In that context, its current valuation of 5.3 times sales looks reasonable. Investors should feel comfortable buying a small position in this international stock today.

Should you invest $1,000 in ServiceNow right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and MercadoLibre. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill, MercadoLibre, and ServiceNow. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

Potential Stock Splits in 2024: 2 Magnificent Growth Stocks Up 575% and 780% in 7 Years to Buy Now and Hold Long-Term was originally published by The Motley Fool

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