Up almost 80% this year, MercadoLibre stock is still very attractive

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Amazon ($AMZN) stock has soared 70% this year amid resilient consumer spending, AI hype, and increasing cost discipline. While this is certainly an impressive performance for a giant company like Amazon, one of its main competitors outside of the US has performed even better. MercadoLibre ($MELI), or the Amazon of Latin America, has seen its stock soar almost 80% this year, amid a spectacular fundamentals performance.

MercadoLibre is currently experiencing a period of remarkable top and bottom-line improvement, and investors are rewarding the company by sending its stock price sharply higher.

Up almost 400% over the past five years, MELI is officially one of the best-performing stocks on the market. This stellar performance is likely to continue as MELI’s growth is accelerating, and its profits are soaring. Given the stock’s reasonable valuation, MELI stock can continue to outperform the market by a wide margin. Let’s take a deeper look.

Continued Hyper Growth, Post-Pandemic

While most companies (with the exception of Nvidia, obviously) are searching for growth in the post-pandemic world, MELI’s growth momentum remains impressively strong. Despite the transition back to a normal post-pandemic environment, MercadoLibre has shown no signs of slowing down.

MercadoLibre's success is deeply rooted in its comprehensive e-commerce ecosystem, which spans across 18 countries in Latin America. As the region's largest online marketplace, MELI has become an integral part of the lives of millions, offering a wide array of products from electronics and fashion to groceries and household goods. The company's strategic approach of tailoring its services to the specific needs of the diverse LatAm market has solidified its position as a leader in the region.

In a post-pandemic world, where e-commerce has become an essential part of daily life, MELI’s platform has not only adapted but thrived. The convenience of online shopping, coupled with MELI's extensive logistics network, has positioned the company as a go-to destination for consumers looking for a seamless and reliable shopping experience. MELI spent billions in the past decade building an advanced logistics network, similar to the one Amazon has built in the US. This network now provides a durable competitive advantage that keeps MELI the leader in its space.

However, MercadoLibre's success is not confined to e-commerce alone. Perhaps MELI is now more of a fintech than an e-commerce giant. The company has leveraged its platform to offer a range of financial services. MercadoPago, MELI's digital payments platform, has played a crucial role in facilitating transactions on its e-commerce platform. But beyond that, it has evolved into a full-fledged financial ecosystem, providing users with services like digital wallets, credit lines, and even investment opportunities.

The diversification into fintech is a strategic move that goes beyond just responding to market trends. It aligns with the broader vision of creating a holistic digital experience for users across Latin America. As traditional banking services face disruption globally, MercadoLibre is well-positioned to capture a significant share of the growing digital financial services market in the region.

The strong performance in both the e-commerce and fintech sectors is expected to last for the foreseeable future given the rapid growth of both industries in the region. Unlike Europe and North America, LatAm is still an emerging market where e-commerce and fintech are both growing rapidly.

Accelerating Growth Confirms The Significant Growth Opportunities In The LatAm Market

MercadoLibre’s Q3 earnings results blew past analyst estimates, a clear sign of continued strong growth momentum. All of the company’s metrics accelerated y/y in Q3 compared to Q2, highlighting the company’s growth potential. Q3 revenue jumped 41% y/y to $3.8 billion, beating analyst estimates by $250 million, a massive outperformance. This was also an acceleration compared to the Q3 revenue growth of 32%.

This strong performance was driven by accelerating growth across all regions and business verticals. The growth of Gross Merchandise Volume (GMV) accelerated to 59% y/y in Q3 on a constant-currency basis, from a 47% growth in the previous quarter. The growth of items sold also accelerated, contributing to the accelerating GMV growth. It seems like MELI’s ecosystem has become so powerful that it organically attracts more customers and makes existing customers spend more over time.

The growth of fintech revenues also accelerated in Q3, underscoring MELI’s growing market share in one of the fastest-growing sectors in the region. In Q3, the Total Payment Volume (TPV) of MercadoPago soared 121% y/y to $47.3 billion, on a constant-currency basis, compared to a 97% growth in Q2. Also, off-platform TPV jumped 145% y/y in Q3 to $35.3 billion. The hyper-growth of the off-platform TPV is a clear sign that MELI’s MercadoPage fintech arm is gaining mainstream adoption in the region, which is actually the company’s main goal. MELI is now officially a fintech giant, and the strong growth momentum suggests that the growth potential is still vast.

Equally impressive is MercadoLibre’s bottom-line performance. The company is achieving operating leverage while delivering accelerating growth. As you can see below, its Q3 operating margin increased dramatically year-over-year, rising to 18.2%, vs. 11% in the same period a year ago. The main drivers were the economies of scale and the company’s improved underwriting practices.

MercadoLibre offers loans to businesses and individuals through its MercadoCredito division. In Q3, the credit portfolio increased 23% y/y to $3.4 billion, but the company improved its underwriting practices, resulting in an 11% y/y decrease in the provision for doubtful accounts.

Providing lending services in emerging markets can be extremely risky due to the lack of extensive historical data. However, MELI is leveraging its e-commerce and fintech divisions to gain valuable insights into consumer and merchant financial health, allowing it to underwrite carefully and profitably.

What About Valuation

While MELI’s stock price has soared in the past few years, its valuation multiple has plunged because of the hypergrowth rates. As you can see below, at current prices of around $1,522 per share, MELI trades at a PS ratio of 5.8x, or near all-time lows but it’s growing faster compared to the period between 2010 and 2017 when the PS ratio was above 10 or even 15x.

The interest rates were much lower back then and allowed high-growth names to trade at higher valuation multiples, but the current PS multiples have significant upside potential. In a lower interest-rate environment, MELI’s PS ratio could rise again up to 8 or 10x sales given the continued rapid growth and increasing profit margins.

Assuming the company exits 2024 with a PS ratio of 6x, and based on expected 2024 revenues of $17.4 billion, MELI stock could rise 35% from current prices and reach $2,057 by the end of 2024.

What Else

MercadoLibre is one of the most promising growth stocks on the market. It has a leading market position in the e-commerce and fintech sectors in LatAm, an emerging region with strong future prospects. On top of that, the company has built a moat by creating a comprehensive and sticky ecosystem that keeps customers engaged. This ecosystem makes consumers spend more over time and organically attracts even more customers, resulting in rapid, accelerating, and efficient growth. Given the stellar fundamental performance and reasonable valuation, it seems like $MELI will continue to create shareholder value for the foreseeable future.

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