The Latte
Posts
MercadoLibre Is The E-commerce Name To Buy For 2025 & Beyond

MercadoLibre Is The E-commerce Name To Buy For 2025 & Beyond

Unjustified drop creates buying opportunity

George Babis
January 08, 2025

In partnership with

Here’s Why Over 4 Million Professionals Read Morning Brew

Business news explained in plain English
Straight facts, zero fluff, & plenty of puns
100% free

See for yourself

One of the best-performing e-commerce stocks of the past few years has taken a breather lately. Shares of MercadoLibre, the leading e-commerce brand in Latin America, have fallen nearly 17% since the company reported earnings results in November.

The dip was an overreaction to the sequential decline in earnings caused by increased provisions for bad debt. While this impacts short-term profitability, it reflects the company’s growth in consumer credit and merchant loans that drive growth in its e-commerce division. Let’s see why this drop presents a compelling buying opportunity for growth investors.

Unique Growth Play in LatAm

MercadoLibre, Latin America’s largest e-commerce and fintech giant, stands out as one of the most exciting growth stories outside the US. MELI’s ability to consistently expand both its top and bottom lines underscores the strength of its business model and market leadership.

As one of the most dominant players in the region, MercadoLibre has capitalized on the rapid digitalization of Latin America, mirroring Amazon’s success in the U.S. However, what differentiates MercadoLibre is its dual focus on e-commerce and fintech, positioning it to tap into two high-growth sectors simultaneously.

In Q3 2024, MercadoLibre’s financial services arm, Mercado Pago, contributed 41% of total revenues, reflecting the company’s strategic pivot towards fintech. This diversification not only reduces reliance on e-commerce but also expands MercadoLibre’s addressable market by providing credit and payment solutions to millions of underserved customers.

MercadoLibre’s growth story is driven by the vast potential of Latin America’s underpenetrated markets. With significant opportunities remaining in its largest markets—Brazil, Mexico, and Argentina—the company has ample runway for expansion. As MercadoLibre deepens its market penetration and strengthens logistics networks, the long-term growth prospects remain highly attractive.

Unlike Amazon, MercadoLibre doesn’t have a cloud computing division like AWS. Instead, the company’s growth outside of e-commerce is driven by fintech. Mercado Pago’s rapid expansion, including issuing 1.5 million credit cards in Q3 2024 alone, underscores MercadoLibre’s potential to dominate both online retail and digital finance in Latin America.

While Amazon continues to expand in Latin America, MercadoLibre maintains a competitive edge through its extensive logistics infrastructure and deep understanding of the region’s unique challenges. Building fulfillment and delivery networks across countries like Brazil and Argentina is complex, and MercadoLibre’s investments in logistics give it a significant head start.

In Q3, MercadoLibre announced plans to double its fulfillment centers in Brazil by the end of 2025, increasing same-day delivery coverage by 40%. This focus on logistics mirrors Amazon’s early playbook, demonstrating MercadoLibre’s commitment to enhancing the customer experience and driving retention through faster delivery times.

Additionally, MercadoLibre’s loyalty program, Meli Mas, has been expanded to offer benefits similar to Amazon Prime, including free shipping and streaming services. By replicating proven models, MercadoLibre ensures that it can compete effectively while leveraging its local expertise to outperform global competitors.

Solid Top & Bottom Line Performance

Despite the negative market reaction to earnings results, MercadoLibre continues to deliver impressive growth in gross merchandise volume (GMV) and profitability across its primary markets in Brazil and Mexico. This combination of strong operational performance and market expansion highlights MercadoLibre’s long-term investment appeal.

The company’s ability to capitalize on rising e-commerce adoption, particularly in Brazil and Mexico, contributed to significant revenue expansion. With increasing consumer demand and rising incomes across Latin America, MercadoLibre appears poised for sustained growth in both revenue and earnings.

MercadoLibre’s momentum is evident in the company’s impressive GMV growth. GMV serves as a critical metric for e-commerce businesses, reflecting the total value of goods sold on the platform. In Q3, MercadoLibre reported 71% y/y GMV growth, driven by higher customer acquisition and increased product sales. Argentina led the way with an extraordinary 218% surge in GMV, despite facing economic volatility and inflation. Brazil’s GMV also grew solidly at 34%, followed closely by Mexico at 27%.

Profitability is another area where MercadoLibre excels. The company’s double-digit operating margins set it apart from competitors, with Brazil and Mexico contributing significantly to its profitability. Although MercadoLibre’s Q3 operating margin of 10.8% represented a sequential decline, margins for the year remain 3.2 percentage points higher than in 2023. This consistent profitability underscores the strength of MercadoLibre’s core business.

The company’s net income reflects its ability to scale profitably. In Q3 2024, MercadoLibre generated $397 million in net income from its e-commerce operations, an 11% increase y/y, despite the increased investments in fulfillment centers and technology. Over the past twelve. months, the company’s net income reached $1.4 billion, with earnings per share (EPS) growing by 52%.

Looking ahead, MercadoLibre has several growth levers to drive further expansion. The company’s strategy includes deepening its market penetration in South and Central America while exploring potential expansion into the United States. Continued focus on GMV growth, particularly in Mexico and Brazil, will remain a priority. Additionally, MercadoLibre is investing in artificial intelligence to enhance customer engagement and drive higher conversion rates across its platform.

The company’s fintech division is another critical area for growth, with transactions increasing 21% y/y in Q3. By integrating financial services with its e-commerce offerings, MercadoLibre can capitalize on both GMV and total payment volume growth. This synergy is expected to bolster revenues and improve customer retention.

What About Valuation

MercadoLibre's recent stock price dip offers an attractive entry point for long-term investors. Currently, the company trades at a P/E ratio of 49x, the lowest valuation multiple of the past five years.

For comparison, Amazon and Shopify trade at P/E ratios of 49x and 108x, respectively. While MercadoLibre's valuation aligns closely with Amazon, its growth potential exceeds that of the e-commerce giant. Analysts project MercadoLibre to deliver 8 percentage points higher annual EPS growth than Amazon, reinforcing its attractiveness as a growth-oriented investment.

Based on analyst estimates for an EPS of $47.3 in 2025, and assuming its PE ratio hovers around 50, the stock can rise 31% this year to $2,365.

What Else

The recent pullback in MercadoLibre’s share price, following strong Q3 earnings, presents an attractive entry point. The market’s reaction to increased credit reserves and logistics investments led to short-term margin compression, but these strategic moves are essential for long-term growth.

MercadoLibre’s credit expansion is a cornerstone of its fintech strategy, with provisions for bad debt recognized upfront. While this impacts short-term profitability, it reflects the company’s growth in consumer credit and merchant loans—key drivers of future earnings. As MercadoLibre scales its financial services, the upfront provisioning will translate into sustained revenue and profit growth over time.

Moreover, the company’s aggressive investments in fulfillment and logistics are necessary to solidify its dominance in e-commerce. These initiatives are unlikely to yield immediate returns but will strengthen MercadoLibre’s competitive position and drive market share gains in the years ahead.

While MercadoLibre’s growth potential is compelling, investors must account for the political and economic risks inherent to Latin America. Currency devaluation, inflation, and regulatory uncertainty in markets like Argentina pose challenges that could impact near-term profitability.

However, MercadoLibre’s diversified presence across multiple countries mitigates some of these risks. Brazil and Mexico, the company’s two largest markets, continue to demonstrate economic stability and growth potential. Over the long term, MercadoLibre’s focus on expanding its footprint in underpenetrated markets should offset short-term volatility.

With shares trading at a discount, now may be the ideal time to consider adding $MELI to a growth-oriented portfolio.

MERCADOLIBRE RATING

Short Term: Buy

Long Term: Buy

🎯 2025 Price Target: $2,365

I have no positions in the stocks mentioned.