MercadoLibre (NASDAQ: MELI) has continuously impressed investors by sustaining an explosive growth momentum for years. The company’s latest results once again astounded the markets, with its growth metrics coming in hot. MercadoLibre’s expanded profitability prospects arising from robust top-line growth and rising margins combined with the stock falling significantly over the past year have resulted in MercadoLibre’s shares hovering at rather attractive levels. I am bullish on the stock.
What Does MercadoLibre Do?
As a quick reminder, MercadoLibre is by far the most prominent e-commerce and payment platform in Latin America in terms of unique visitors and page views. It has a vibrant footprint in 18 countries. The company has managed that by delivering a suite of advanced technology solutions to the entire value chain of commerce. Some of its other services constitute fintech solutions, e-store setups, loan financing, and advertising.
MELI’s Unstoppable Growth Momentum
MercadoLibre’s growth momentum has been truly unstoppable. To provide some perspective, the company has grown its revenues every single year with no exceptions since 2004, which is as back as its publicly available data goes. Regarding its more recent performance, MercadoLibre’s revenues increased from $298.9 million in Fiscal 2011 to $7.07 billion last year, suggesting a 10-year CAGR of 37.2%.
The company’s massive growth has been powered by the fact that Latin America boasts a population of 650 million people currently undergoing an accelerated internet adoption phase. MercadoLibre is capitalizing on this technological revolution by expanding its operations very rapidly, capturing as much of this “new” market as soon as possible.
The company’s most recent results were one of the most impressive among its e-commerce peers during this earnings season, as MercadoLibre posted explosive growth in revenues and net income, despite the shaky underlying macroeconomic environment.
In its Q2-2022 results, MercadoLibre’s Gross Merchandise Value increased 26.2% on an FX-neutral basis to $8.6 billion. Items sold exceeded 275 million on the platform, leading to the company posting record net revenues of $2.6 billion. This implies a massive increase of 56.5% year-over-year on an FX-neutral basis. These numbers are particularly strong, considering last year’s results had already been inflated due to the industry tailwinds created as a result of the pandemic.
Further, the company’s Fintech business also performed exceptionally, with Total Payments Volume (TPV) rising 83.9% year-over-year to $30.2 billion. This actually implies an acceleration from the previous quarter’s 81.2%.
The massive increase was aided by robust growth from the Mobile Point of Sale (MPOS) business and QR payments. The MPOS business continues to add new devices to its installed base, while QR payments kept increasing greatly both in Argentina and Brazil. QR payments growth is a very positive sign that confirms that wallet usage is seeing advanced adoption.
MercadoLibre’s Fintech Prospects Look Great
I want to note that while MercadoLibre’s Payment Solution segment recorded exceptional growth, I am even more interested in the company’s payment solutions that are not necessarily confined within MercadoLibre’s ecosystem.
Specifically, in Q2, about 70% ($20.8 billion out of $30.2 billion) of TPV took place off of MercadoLibre’s commerce platform. This means that the segment’s evolution prospects are not restricted to MercadoLibre’s standalone growth and can continue growing even if MercadoLibre’s own e-commerce growth slows down.
Why is this important? Because fintech solutions should continue to grow massively in Latin America in the coming years since a considerable chunk of the population is still unbanked.
Particularly, around 10% of the adult population in Brazil does not make use of a bank account. In Argentina, the case is even more excessive, with roughly 51% of all adults staying unbanked. Therefore, there is an incredibly extensive unexploited market for MercadoLibre to profit from.
Improving Profitability and a Justified Valuation
MercadoLibre’s ever-continuous growth has led to mighty economies of scale arising over time, leading to expanded margins and, thus, higher profitability prospects. For instance, pushed by operating leverage in shipping and effective fee collection, the company’s Q2 gross margins expanded from 44.3% to 49.4% year-over-year.
Overall, the company’s profitability is improving dramatically, with net income reaching a new all-time high of around $123 million during the quarter. Analysts are forecasting the company to achieve earnings per share of $7.59, which implies an outrageous P/E of close to 113.
However, the combination of MercadoLibre’s revenue growth, internal efficiencies, and expanding margins are likely to lead to an EPS growth CAGR north of 50% over the next few years. In that regard, this multiple is entirely justified, as the company’s net income has only now started to pick up.
Is MELI Stock a Buy or Sell?
Turning to Wall Street, MercadoLibre has a Strong Buy consensus rating based on 10 Buys and one Hold assigned in the past three months. At $1,278.75, the average MercadoLibre price target suggests 49.1% upside potential.
Conclusion: An Attractive Company, but Don’t Ignore the Risks
MercadoLibre’s explosive growth numbers, combined with evolving profitability prospects as a result of scaling economics, have made its beaten-down shares rather attractive. Still, before investing, investors should keep in mind the underlying risks attached to the stock. Firstly, parallel to the U.S. and Europe, inflation in Latin America has also skyrocketed lately. It could ultimately suppress consumers’ purchasing power, thus, harming the company’s growth prospects.
Additionally, due to the entirety of MercadoLibre’s revenues being sourced outside of the U.S., there are geopolitical and FX risks involved, which some investors may prefer to avoid.
Nonetheless, the rewards in MercadoLibre’s investment case likely overshadow the underlying risks involved.
