The past five years have been erratic. A worldwide pandemic, a couple of bear markets, severe economic troubles, and global instability have affected individuals and businesses in too many ways. Throughout it all, some corporations, though a bit battered and bruised, have performed well and continue to do so.
MercadoLibre (MELI), an e-commerce company that operates in Latin America, is one such company. Fortunately, MercadoLibre still has plenty of growth fuel. Here is why the stock could perform well through the next decade.
What’s been going right for MercadoLibre
MercadoLibre is the leading e-commerce player in South America. Although it is sometimes called the Amazon of Latin America, the two businesses have some important differences. MercadoLibre’s e-commerce and logistics (Mercado Envios) operations are just part of its business. It also has a fintech unit through Mercado Pago, an online payment platform, and Mercado Shops, which allows businesses to build online storefronts. Over the past few years, the company has delivered strong financial results.
While it suffered due to a slowdown in the e-commerce industry between 2021 and 2022, it has rebounded since. MercadoLibre has been consistently profitable since 2022, much to the joy of investors. In the second quarter, the company’s revenue grew by almost 42% year over year to $5.1 billion. Its top-line growth rate slowed compared to the incredible highs it reached in the early days of the pandemic, but that was never going to be sustainable. This metric is back somewhere within its pre-pandemic range.
Meanwhile, MercadoLibre’s net income of $531 million more than doubled compared to the year-ago period. Profitable growth is the way to go in today’s market — investors are far less forgiving of companies that continue to turn in red ink on the bottom line, partly due to higher interest rates and somewhat challenging economic conditions.
Beyond the company’s revenue and earnings, MercadoLibre showed meaningful progress across the board. Its gross merchandise volume, fintech monthly active users, total payment volume, and more all trended in the right direction. With results like these amid relatively challenging conditions, no wonder investors continue to bid up the stock.
Why there is plenty of upside left
We can be reasonably sure that the e-commerce and fintech industries will continue growing at least until the end of the decade, and likely beyond. That’s what many analysts project, partly based on consumer trends and the convenience that online retail transactions offer. The Latin American market shouldn’t be an exception. So, MercadoLibre is in an excellent place to perform reasonably well through the next decade, but only if it can maintain its strong position. It’s hard to imagine anyone knocking the company off its pedestal.
MercadoLibre benefits from a moat in at least ways: switching costs and the network effect. Switching has costs because the company’s services are comprehensive and complimentary. Businesses that open online storefronts with MercadoLibre, sell products on its main website, and use its fintech platform to process payments won’t want to close up shop and move to a competitor. They risk losing many customers in the process.
MercadoLibre’s network effect comes from the fact that the more people are plugged into its ecosystem, be it in fintech or e-commerce, the more valuable it becomes to those on the outside looking in. Furthermore, newcomers will need to spend the time and capital to build the infrastructure necessary to do business and ship packages in multiple countries throughout Latin America. That’s a tough thing to do, especially given that some of these countries are somewhat politically unstable.
MercadoLibre has already done the work. What about valuation? The stock’s forward price-to-earnings (P/E) ratio is 55, and the average for the consumer discretionary industry is currently 23.9. However, analysts expect MercadoLibre’s earnings per share to grow at an average of 41.8% per year for the next five years. MercadoLibre’s valuation looks far more reasonable once we take that into consideration.
In 10 years, MercadoLibre’s current valuation won’t matter a whole lot. The stock is likely to deliver outsized returns in the meantime. That’s why it would be a great move to buy MercadoLibre shares today.
— Prosper Junior Bakiny
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Source: The Motley Fool