Stock splits don't matter in terms of changing the value of a company, but many investors still see stock splits as a positive sign of a company's confidence in its long-term prospects. Some companies wait a long time before even considering a stock split, and Latin American e-commerce giant MercadoLibre (MELI 1.96%) certainly isn't the first company to let its stock climb substantially without splitting its shares. Nevertheless, as MercadoLibre's stock price has climbed to new heights over the past decade, some investors want to know if they'll finally see the company do a split.
Why hasn't MercadoLibre done a stock split before now?
In evaluating potential future stock splits, it's useful to look at what has motivated a company to do a stock split in the past. In MercadoLibre's case, the company has never done a stock split, so there's no history to examine that can tell us whether there's a line in the sand at which the e-commerce specialist is likely to make a move.
MercadoLibre has been highly successful, and it didn't take long for shareholders to realize substantial gains from the stock. In its 2007 IPO, MercadoLibre offered stock at $18 per share, and the stock opened at $22 and closed on its first day at $28.50. Shares climbed to $75 per share within a few months before the financial crisis took MercadoLibre back down below its IPO level briefly. Many investors feared that the 2008 recession would put an end to interest in global investing, and stocks focusing on emerging markets like Latin America took particularly large hits.
Once the panic was over, MercadoLibre steadily rebounded. The stock climbed substantially above the $100 per share mark in 2013, a point at which many companies would have considered a stock split. Yet the issue never came up at any of its conference calls following earnings results, and company officials seemed content to let the shares continue to trade in their original form. Sluggish performance in the commodities markets in the ensuing years led to a period of stagnation for MercadoLibre's stock price, and it wasn't until 2016 that the company made its most recent major move higher.
Image source: MercadoLibre.
Could now finally be the time?
The gains that MercadoLibre has posted over the past year and half have been remarkable. In that time, the stock price has almost tripled, climbing to nearly $300 per share.
Several factors have contributed to MercadoLibre's rise. A rebound in economic prospects throughout Latin America has spurred new optimism that a rising consumer class will embrace the e-commerce giant's platform to an even greater extent, adding to its long-term growth prospects. Remarkably, MercadoLibre hasn't really faced the level of competition that investors have seen in the U.S. and in other high-profile markets like China.
In addition, MercadoLibre has gone beyond its initial marketplace to offer a wide range of services, many of which will stand alone in their own right given time. MercadoPago is the company's payment processing service, and just as its peers in the U.S. have seen, there's no inherent limitation that requires MercadoPago be used only on transactions involving MercadoLibre. Similarly, the e-commerce specialist's MercadoEnvios shipping service has implications for logistics beyond order fulfillment, and various other services like purchase financing could also take off and add to MercadoLibre's overall gains ahead.
Not everyone is convinced about MercadoLibre's success potential. Latin America's economies tend to be volatile, and the company's exposure to Venezuela has caused a great deal of turmoil in recent years. Even in larger economies like Brazil, the relative political and economic instability constantly threatens to produce major setbacks to economic growth. Most investors are confident about Latin America's ability to hold onto its forward progress and build up its consumer class, but a history of setbacks holds back some of that optimism.
Don't expect a split soon
The fact remains that stock splits simply aren't as important as they've been in the past. Retail investors are used to buying small numbers of shares to fit their budget, and the need to have share prices at manageable levels for purchases of 100-share round lots simply doesn't exist anymore.
With no indication from management that a stock split is even on the radar, shareholders shouldn't expect MercadoLibre to do a stock split. Moreover, if the company doesn't pull the trigger soon, the clear implications will be that MercadoLibre never intends to do a stock split -- regardless of how successful it might be in the future.
