For American investors familiar with it, the story of MercadoLibre (NASDAQ: MELI) is a master class on succeeding in a challenging business environment. The company has found a way to turn outbreaks of high inflation and regulatory chaos into competitive advantages.
Consequently, the company has pioneered key industries within its region, and its stock trades near record highs. The question now is whether it can continue beating the market over the next five years.
The growth of MercadoLibre
First, if the last five years of MercadoLibre's history are an indication of the next five, its future looks bright. The 290% gain over that time far exceeds the S&P 500's performance and includes a brutal sell-off during the 2022 bear market.
This is likely because MercadoLibre was the first major e-commerce company operating in Latin America, and its non-e-commerce businesses have turned into competitive advantages as companies like Amazon and Sea Limited moved into some of its markets.
Its fintech arm, Mercado Pago, helps support cash-based customers who cannot buy with a credit card. Thus, the fact that Latin America is a heavily unbanked region has worked to its advantage. Moreover, its investment arm, Mercado Fondo, helped Argentinians shelter savings amid that country's rampant inflation. That has also helped the fintech business thrive amid the turmoil.
Its logistics arm, Mercado Envios, can provide shipping and fulfillment services to the sellers on its platform. This has improved the infrastructure for shipping within Latin America and includes an upgrade to same-day and next-day shipping in some areas.
Furthermore, both businesses serve customers who do not shop on MercadoLibre, further boosting MercadoLibre's revenue potential.
Investors should also remember that, like Amazon, MercadoLibre leverages its extensive web presence to sell ads. While it does not publish many details on this enterprise in its financials, it likely serves as a high-margin revenue producer if other large online ad businesses are an indication.
MercadoLibre's financial trajectory
Considering this lucrative opportunity, MercadoLibre's businesses should continue to expand over the next five years, and its financials indicate massive growth could be ahead.
In the first half of 2024, MercadoLibre generated $9.4 billion in revenue. That's a 39% increase from year-ago levels. Additionally, the company continues to grow its profits. In the first six months of 2024, net income of $875 million surged 89% higher. Even though much of that growth came from reducing foreign currency losses, the company is clearly turning revenue gains into higher profits.
Also, considering its potential, shareholders should probably give the company some latitude on the valuation front. Although its price-to-earnings (P/E) ratio is 76, that is arguably a reasonable valuation considering its net income growth. Moreover, Amazon routinely traded at a higher P/E ratio during its growth history. Meanwhile, MercadoLibre's forward P/E ratio of about 57 indicates the earnings multiple is not far ahead of the company's anticipated growth.
Finally, early projections for profit remain favorable. Analysts forecast that net income will grow an average of 42% per year over the next five years. Although this is a way-too-early estimate that is likely to change, it serves as a hopeful sign of growth for MercadoLibre bulls.
MercadoLibre in five years
The state of the world over the next five years is difficult to predict. However, MercadoLibre's investors have many reasons for optimism. The company's business segments not only serve one another, but also solve many of the region's problems as separate entities.
The financials of the internet and direct marketing retail stock appear to confirm its successes, and early projections imply that growth can continue for years to come. Considering its valuation, investors who buy now will pay a premium, but one low enough that outsized gains over the next five years are still within reach.
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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 and Sea Limited. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool has a disclosure policy.
