MercadoLibre(NASDAQ: MELI), the leading e-commerce company in Latin America, has been unstoppable lately. The stock rose more than 50% in the last 12 months alone, bringing its total return to a remarkable 274% in the previous five years.
While existing investors celebrate its outstanding stock performance, potential investors may wonder if they should buy it today to participate in future growth.
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MercadoLibre has been executing at a world-class level
There aren't many companies that can grow at high rates for more than two decades. While Amazon may be the most apparent growth company with such a track record, its smaller peer, MercadoLibre, is another company that has achieved that feat. To put it into perspective, the Latin American e-commerce company grew revenue from $5.6 million in 2003 to $14.5 billion in 2023.
While many factors contributed to its success, the company's solid execution over the years has been one of the main drivers. For instance, it started mainly in the e-commerce sector but has, over the years, diversified into other areas like logistics, payments, and lending. Such diversification helps improve customer satisfaction -- they can rely on one trusted platform for multiple services -- and opens up new growth avenues for the company.
Another example of MercadoLibre's remarkable execution is its geographically diversified business empire across Latin America. To achieve that, the tech company must adopt a localized approach to managing its operations since countries within the region have different languages, cultures, and consumer habits. While it takes enormous time and effort, the result has been more than satisfactory as the company is now the top one or two player in most of its operating regions.
Suppose MercadoLibre can continue to execute at this level. In that case, there is a good chance that the company can continue to deliver above-average growth rates for the foreseeable future as it rides the ongoing tailwinds in this region.
MercadoLibre's prospects in the coming years
Most companies of MercadoLibre's size face challenges in growing at high levels, but the tech giant has no problem sustaining its growth flywheel. For instance, in the second quarter of 2024, it reported a 42% growth in revenue to $5.1 billion (or 113% if excluding the impact of foreign exchange movements).
While the company's solid execution may have been an important driver, strong external tailwinds also contributed to its performance. Ongoing e-commerce penetration, the increase in digital adoption, and a growing middle-class population are just some of the tailwinds supporting the company. Some of these tailwinds could last for years if not decades. For instance, MercadoLibre has close to 57 million active buyers, less than 10% of the 656 million population in the region .
With its diversified offerings across e-commerce, payments (Mercado Pago), logistics (Mercado Envios), lending (Mercado Crédito), and advertising (Mercado Ads), the tech giant has plenty of levers to pull to keep growth coming. Besides, as the company grows, it will gain a scale advantage, leading to better margins. In other words, profits will grow even faster than revenue in the future.
With so much going on, competitors are increasingly crowding the Latin America region, with notable players like Shopee, Shein, and Temu all vying to grow their market share. Thus, competition is a growing risk that MercadoLibre has to pay attention to if it wants to continue to grow at high rates. The silver lining is that the vast market opportunity offers enough room for multiple players to succeed.
Is the stock reasonably priced today?
So far, I have focused mainly on MercadoLibre's business and its prospects. But investors must also consider the stock's valuation. After all, no company is worth an infinite amount of money. Investors must not overpay for the stock to get downside protection and earn a reasonable return.
In the case of MercadoLibre, it trades at a price-to-sales (P/S) ratio of 6.2 and a price-to-earnings (P/E) ratio of 76.7 times. Comparatively, Amazon trades at P/S and P/E ratios of 3.3 and 44.6. These numbers indicate that MercadoLibre trades at a significant premium over its larger peer.
MercadoLibre's bulls may be happy to pay up for the stock, given the upside opportunity. But investors are not getting much downside protection at these levels. If the tech company fails to meet investors' expectations, its stock valuation could fall to reflect the new reality.
What it means for investors
MercadoLibre has a remarkable track record of performance and is well-positioned to keep growing its business for a while as it rides the tailwinds in this region.
The downside is that most (if not all) of those positive factors have been priced into the stock, so buying the stock today offers little margin of safety.
Except for risk-takers or those with long investment horizons of five to 10 years, most investors would probably be better off looking elsewhere.
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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. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.
