What Metrics Can I Use When Adding to a High-Growth Stock That Isn’t Always Profitable?

Traditional metrics aren’t always best when valuing a high-growth company. That’s especially true when profits tend to come and go, as these companies invest heavily to ensure future growth. Are there metrics that can be useful in evaluating these fast-growing companies?

On this episode of Fool Live that aired on Nov. 18, “The Wrap” host Jason Hall and Fool.com contributors Danny Vena and John Maxfield discussed one such company and a couple of metrics that can help lend perspective for these high-flyers.

John Maxfield: I’d be interested to this, here there’s a question — maybe because it’s a question for Danny.

Jason Hall: I love it.

Danny Vena: Of course.

John Maxfield: Question for Danny from Tony E, “What valuation metric do you watch when you’re looking to add to your MELI position?”

Jason Hall: MecardoLibre (NASDAQ: MELI).

John Maxfield: MercadoLibre position.

Danny Vena: Generally speaking, because this a stock that I have followed for so many years, I’ve owned it for a decade now. Initially what I did, and to be honest, I didn’t really follow that many metrics, what I would do is I would buy in any significant dip in the stock price. The reason that I did that is because I’m looking at the long-term opportunities for this business. I was less concerned about buying at a particular metric or trying to reach some specific arbitrary goal.

What I’m looking for is buying, the net income is going up all the time, the revenue’s going up all the time. What I’m doing is when the stock price dips, I’m usually getting a better value point. But if it’s something that you’re really interested in watching, I would say watch the price-to-sales ratio. Because MercadoLibre has been one of those companies that has not consistently had earnings because they plow so much of their profits back into the business. I would watch for dips in the price-to-sales ratio and I can’t tell you off the top of my head what that is. But I mean, if you just go in and look at its chart, it’s very clear. Whenever there’s been 25% to 40% stock price depreciation, those have happened fairly often over the last decade, that has been a really good time to buy the stock.

Jason Hall: I’ll add one more thing in there that I’ve started paying a little more attention to with MercadoLibre. I just talked about it within NV5, and that’s operating cash, Because MercadoLibre, they’ve showed GAAP profits recently and chances are those GAAP profits might go away because there’s just going to continue to pile more money into growing the business, which is going to increase some of their expenses on a non-cash basis which can make the losses, the GAAP earnings not look good. But this year, I think, it’s just a good example. This year, operating income trailing-12-months. Over the past four quarters, operating income has increased a 123%. The stock price has gone up about a 140%. The stock price has not necessarily outrun the trajectory of the company’s growth.

Danny, I think you would agree this is one of those businesses that as its scale increases, like we saw with Amazon a few years ago, because there were all the talks about Amazon is never going to make money. They’re never going to be profitable. Then, they get to this kind of a critical mass. Then, boom, they start kicking off these gigantic cash flows. I think MercadoLibre’s story is going to be very much the same. I think operating cash flows are going to look at this more telling than GAAP net income because of the impact of non-cash expenses on the net income line.

Danny Vena: I think, also, the company is probably going to get to a point and they are not there yet. Amazon certainly isn’t, but at some point in the future, MercadoLibre is going to get to a point where they are producing more cash than what they can reinvest back into their business. Once that happens, I think what you’re going to see is that same explosion of cash flow that Jason is talking about. I also think that the company is going to reinstitute the dividend that they suspended in 2018, which is something that I’m looking forward to.

Jason Hall: A lot of potential there. This could be the best dividend stock that’s not paying a dividend.

Danny Vena owns shares of MercadoLibre. Jason Hall owns shares of MercadoLibre and NV5 Global. John Maxfield has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends MercadoLibre and NV5 Global. The Motley Fool has a disclosure policy.

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