Only a handful of companies have ever claimed a valuation of $1 trillion, and currently there are just three above that milestone: Apple,Microsoft, andAlphabet.
Over the coming years, we'll almost certainly see more trillion-dollar companies as businesses grow and expand, and inflation lifts valuations as well.
In order to reach a $1 trillion valuation, a company will have to have a large addressable market to penetrate, a history of gaining market share, and the ability to generate a profit. Two fast-growing stocks that have all three of these qualities and a chance at reaching $1 trillion by the end of the decade are Airbnb(ABNB 0.84%) andMercadoLibre(MELI -1.14%).
1. Airbnb is disrupting the travel industry and beyond
Airbnb has grown rapidly from humble beginnings as AirBed & Breakfast, a concept that a group of roommates came up with in 2008 to help them pay the rent. Today, it's a major player in the travel industry.
Along the way, the company has grabbed market share from traditional hotel chains, but it has also created an entirely new way to travel. By essentially inventing the concept of home-sharing, Airbnb has made it easy for families and large groups to stay together, for anyone to stay in an area where hotels aren't unavailable, and to stay somewhere with a kitchen or oven for several weeks or months.
Not only has the concept resonated around the world, but Airbnb has also become the dominant platform for home-sharing: Its name is used as both a noun and a verb to mean staying at a stranger's home.
The business is also delivering impressive results. Revenue jumped 29% in its most recent quarter to $2.9 billion, and it has posted a 20% profit margin over the last four quarters.
Also, Airbnb has become a free-cash-flow machine, generating $3.3 billion in free cash, for a margin of 41%. The company has almost nothing in capital expenditures, meaning it will be able to plow that cash back into the business or return it to shareholders.
Looking ahead, Airbnb should continue to gain market share from hotels, and it should be a significant beneficiary of the remote-work trend, which gives people an opportunity to travel year-round if they can do their jobs from anywhere. And the company can expand with adjacent products like a loyalty program, an airline partnership, and by expanding its experiences into services like a personal chef or massage therapist who serves guests in the homes they're staying in.
At its current market cap of $64 billion, a $1 trillion valuation in eight years might seem like a stretch, since it implies a 40% compound annual growth rate. However, if the company can grow revenue by 20% a year, improve profit margins, and the stock benefits from expansion in its earnings multiple, it could approach $1 trillion by 2030.
2. MercadoLibre is redefining commerce in Latin America
Like Airbnb, MercadoLibre has grown rapidly over the course of its history through e-commerce, digital payments, and related businesses in Latin America.
The stock, which went public in 2007, has already proved itself a winner with shares up more than 3,000% since then. Much like Amazonhas done, MercadoLibre consistently puts up high growth numbers. And it has used its leading position in e-commerce to add on new businesses like Mercado Pago, which offers digital payment services to both online and offline retailers, including through point-of-sale machines; Mercado Envios, its logistics business; a lending arm in Mercado Credito, and even an asset-management business in Mercado Fondo.
The company has also recently begun ramping up advertising on the platform, taking advantage of high customer traffic and its position near the bottom of the marketing funnel at the purchase decision. As a result of the expansion of advertising and other businesses, including Mercado Credito, profitability at the company is exploding.
In its third quarter, operating margin reached 11%, up from 6% after adjustments in the quarter a year ago.
MercadoLibre has also put up strong growth at a time when its U.S. counterparts like Amazon have struggled, showing its ability to grow and gain market share even in a recessionary environment. On a currency-neutral basis, revenue jumped 61% to $2.98 billion in the third quarter, and the company looks set for more market share gains after its top rival in Brazil, Americanas, is collapsing after revealing a $4 billion accounting error.
MercadoLibre does nearly all of its business in three Latin American countries: Brazil, Mexico, and Argentina, giving it the opportunity to expand into adjacent geographic markets as well as continue to penetrate Latin America's largest economies.
As the middle class grows and discretionary spending expands in Latin America, MercadoLibre should continue to be a winner. At its current market cap of $53 billion, the company would need similar growth to Airbnb to achieve a $1 trillion valuation. But with revenue up 61% in its most recent quarter, it seems capable of delivering the top-line growth necessary, and its profit margins should expand as higher-margin businesses like ads, credits, payments, and its third-party marketplace grow.
With a large market in Latin America to penetrate, a $1 trillion market cap is achievable for MercadoLibre in the next decade.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Airbnb, Amazon.com, and MercadoLibre. The Motley Fool has positions in and recommends Airbnb, Alphabet, Amazon.com, Apple, MercadoLibre, and Microsoft. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
