It might not sound like much, but 20% upside is a big deal. When Wall Street analysts set price targets for stocks, they're thinking about a roughly one-year time frame. For perspective, the S&P 500 goes up about 10% per year on average.
If your $10,000 investment grows at a 10% compound annual growth rate (CAGR), you'll have over $16,000 in five years. But if your investment grows at a 20% rate, you'll have nearly $25,000 -- that's a huge difference.
And on that note, Latin America's MercadoLibre (MELI -0.61%) and cosmetics chain Ulta Beauty (ULTA -0.23%) are two stocks with greater than 20% upside ahead, according to select Wall Street analysts. Here's what investors should know.
1. MercadoLibre
According to TipRanks, 12 analysts recommend buying MercadoLibre stock and two recommend holding. But the average price target is over $1,900 per share, which implies 20% upside from where it trades as of this writing.
This business is doing some exciting things that are creating value for its shareholders. MercadoLibre has one of the biggest e-commerce platforms in Latin America and has an impressive logistics network that helps it take market share. For perspective, the company has processed merchandise sales volume of nearly $47 billion over the last year -- that's big.
However, MercadoLibre's platform could get much bigger thanks to ongoing e-commerce adoption in the region. As an example, almost 70% of Brazilians use e-commerce today according to Statista, which isn't bad. But more than 80% are expected to use it by 2029. This is a strong adoption trend. And e-commerce sales in Brazil are expected to nearly double in coming years, partly helped by this trend.
Brazil is MercadoLibre's largest market, which is why it's a good example. But e-commerce is growing in the company's other markets as well. Moreover, MercadoLibre is more than e-commerce -- it has other big parts of the business as well, including financial services, that will likely drive top-line growth in coming years as well as improve profitability.
Unlike many prominent analysts, I don't think that investors should place short-term expectations on MercadoLibre stock or any other stock -- sometimes it can take a stock's price a long time to respond to favorable business results. But I believe MercadoLibre is on the right path. And it could have far more than 20% upside ahead as it takes advantage of its leadership position in its markets.
2. Ulta Beauty
According to TipRanks, of the 13 analysts who recommend buying Ulta Beauty stock, seven recommend holding, and one recommends selling. But even when accounting for the price target of that outlier analyst, the average price target is almost $487 per share, suggesting there's 28% upside from where it trades right now.
As of this writing, shares of Ulta Beauty are down more than 30% from their highs, which is the largest pullback shareholders have seen in over three years. Investors are worried about competition in the space. But allow me to point out why this company is positioned well to compete.
E-commerce platforms and social media marketing are allowing digital cosmetics companies to quickly grow in relevance. But Ulta Beauty provides something these digital rivals can't: salon services. There will always be routine reasons and special occasions to drive someone to get professional help with hair, makeup, and more. And this can keep customers going to Ulta Beauty.
According to its 2023 annual report, only 3% of Ulta Beauty's net sales of $11 billion was related to beauty services. But by providing something that can't be done online, it keeps customers coming through the doors. And many make retail purchases while they're there.
Moreover, a whopping 95% of sales for Ulta Beauty come from its 43 million loyalty members. For perspective, at the company's investor day in October 2021, management said it had just 34 million members. But these were also responsible for about 95% of total sales.
Let me put this another way: From 2021 through 2023, Ulta Beauty grew its loyalty members by about 26% and it grew its net sales by about 30%. In both years, the loyalty members accounted for roughly 95% of sales. This means that these aren't nominal new members that Ulta Beauty is attracting. To the contrary, average spend per active loyalty member has increased for multiple years.
Putting it all together, Ulta Beauty stock is down because investors are worried about its ability to compete. But with necessary in-store services and a demonstrably loyal customer base, I think fears are overblown. And because fears are overblown, Ulta Beauty stock now trades at a price-to-earnings (P/E) valuation of about 15 -- nearly its lowest in a decade.
ULTA PE Ratio data by YCharts
That low valuation makes this a good time to buy some shares of Ulta Beauty and I wouldn't be surprised to see this stock outperform the S&P 500 over the next several years. But the same can be said about MercadoLibre stock. I think both are candidates to outperform over the longer term, which could make 20% upside just the beginning.
