MercadoLibre (NASDAQ: MELI) has won over investors with its successes in a difficult environment for conducting business. Despite the challenges businesses can face in Latin America, MercadoLibre is succeeding in multiple areas, and its stock has bounced back from the 2022 bear market to set new record highs.
Moreover, MercadoLibre is a business that backs what has become a fast-growth stock. While it has many attributes that help explain its success, three in particular help explain why investors should buy shares in the online and direct marketing retailer now.
1. MercadoLibre is anti-fragile
In the investing world, "anti-fragility" means that a company becomes stronger in the face of challenging conditions, and this would undoubtedly describe MercadoLibre.
It operates exclusively in Latin America, a region where countries often experience difficult regulatory environments, political instability, and high inflation. However, instead of shrinking back from such challenges, MercadoLibre turns those difficulties into business opportunities.
When it began selling goods online, a large majority of the people in its markets were cash-based customers who could not buy on the platform. Instead of accepting the situation, it created Mercado Pago to provide products and services to enable people to make digital transactions. So successful was this fintech business that it opened the platform to customers who were not buying from MercadoLibre.
Mercado Envios, its shipping and fulfillment arm, succeeded in much the same way. Ultimately, it provided fulfillment and shipping services to third-party businesses selling their wares on MercadoLibre.
2. MercadoLibre is a leader in several industries
Such segments also helped the company become the Latin American leader in e-commerce and beyond. Online shopping was in its infancy when MercadoLibre launched its sales platform in 1999. Since Amazon was little more than a bookseller at that time, MercadoLibre could more easily dominate in Latin America.
Moreover, even if Amazon could have gained more of a foothold, it doesn't offer fintech services. Thus, it likely could have never gained the market leadership MercadoLibre achieved with Mercado Pago's help. Furthermore, fintech was a largely nonexistent industry at the time of Mercado Pago's launch. Its decision to become a fintech provider to other businesses positioned it to become a segment leader in its region.
Likewise, Mercado Envios established market leadership of its own. Though American consumers may now take same-day or next-day shipping for granted, it did not exist in Latin America before Mercado Envios.
3. MercadoLibre stock is relatively inexpensive
Considering all of the company's strengths, it may surprise investors that MercadoLibre stock trades at what many would consider a reasonable valuation.
Admittedly, some observers may disagree with that assessment: Based on its price-to-earnings (P/E) ratio of 73, it's not inexpensive. That P/E is considerably higher than Amazon, trading at 43 times earnings, or Alibaba, which has a P/E ratio of 22. However, the P/E metric does not factor in MercadoLibre's growth, which is massive by any measure. In the first half of 2024, its revenue increased by 39% year over year to $9.4 billion.
That was not a one-time event. Revenue grew by 37% in 2023 and 49% in 2022 when the pandemic still hampered many offline businesses.
Additionally, MercadoLibre became profitable on an annual basis in 2021, and its net income growth has increased from there. In the first half of 2024, net income rose 89% to $875 million. So high is its income growth that its price/earnings-to-growth (PEG) ratio is just under 0.9. Any stock with a positive PEG ratio below 1 is generally viewed as undervalued. This makes it more likely that even some value investors will continue to buy MercadoLibre stock despite its lofty P/E ratio.
Investing in MercadoLibre
On the surface, MercadoLibre looks like an unlikely growth story. It operates in a difficult business environment and had to build other businesses from scratch to help its core segment survive and compete. However, those secondary businesses helped to make MercadoLibre anti-fragile and allowed it to establish industry leadership within Latin America in more than one niche.
Despite its considerable growth and high P/E ratio, its valuation does not appear to fully reflect the massive growth potential ahead of it. When considering all these factors, investors should consider buying MercadoLibre stock even as it trades near its record high.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has positions in MercadoLibre. The Motley Fool has positions in and recommends Amazon and MercadoLibre. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
