Over the past couple of decades, a new breed of company has emerged. Borne of advances in technology, these next-generation players were catalysts for major changes in consumer behavior, causing shifts that have continued to this day. The rapid adoption of online retail and digital payments has really started to gain steam in recent years. Yet even as this paradigm shift is ongoing, investors who acted on these trends early have been more than amply rewarded.
Consider some of the biggest players in the e-commerce space. Shares of digital seller Amazon.com have grown more than 2,500% over the past 10 years, and by empowering the next generation of online merchants, Shopify stock has gained more than 3,900% since its debut in 2015. Two cutting-edge providers in the digital payments space have notched impressive returns for investors over the past five years: Mobile payments processor Square and digital payments provider PayPal have returned 769% and 383%, respectively, since debuting in 2015.
Gains of this magnitude will no doubt have some investors feeling that the train has already left the station. There is, however, another way to take advantage of these once-in-a-generation shifts in consumer behavior that will likely produce similar -- or even more robust -- gains over the coming decade.
Stepping back in time
There's a little corner of the globe that lags behind the U.S. by nearly a decade when it comes to e-commerce adoption and digital payments: Latin America. This gives investors in MercadoLibre (MELI -0.23%) the opportunity to tap into these massive trends earlier in their lifecycles.
During the first quarter of 2020, e-commerce sales represented about 12% of total retail sales in the U.S., but 10 years ago, that stood at about 4%. To close out 2019, online sales represented just 4.2% of total retail sales in Latin America. This illustrates the opportunity in the region, particularly since it has a population nearly twice the size of the U.S.
MercadoLibre is perfectly positioned to take advantage of that opportunity. The company is the undisputed e-commerce leader in each of the major countries in which it operates, in terms of unique visitors and number of page views. Like Shopify, it provides merchants with all the tools they need to set up and maintain an online store, including shipping, fulfillment, warehousing, and payments. Similar to Amazon, its the first stop for many consumers in Latin America looking to make an online purchase.
Speaking of payments ...
It's important for investors to understand that the purchasing dynamic is very different in Latin America than in the U.S., as the majority of transactions in the region are still in cash. Studies show that roughly 70% of the population doesn't have a bank account, and only between 20% and 55% use a credit card, though this varies by country.
To facilitate its e-commerce business, MercadoLibre developed a payment method that addresses the unique needs of consumers in the markets it serves, an under-the-radar advantage to this day. Mercado Pago is a digital payment system originally modeled after PayPal, allowing customers to use credit cards for online transactions but also allowing customers to make purchases online and then pay in cash at a network of convenience stores and other locations to complete the transactions. The addition of a digital wallet completed this fintech trifecta.
Mercado Pago was so successful at facilitating digital purchases that other online retailers soon accepted it as a payment method, and it then made the jump to brick-and-mortar retail. The addition of mobile point-of-sale devices helped accelerate its adoption at physical stores.
In the first quarter, the company reported revenue that grew 71% year over year in local currencies after generating 84% growth in the fourth quarter. While the e-commerce segment was up 62%, payments and other fintech revenue grew 83%. Even more impressive was Mercado Pago's off-platform growth, as total payment volume jumped 140% year over year, while the number of transactions soared 146%.
This all goes to show that, much like its U.S. counterparts, MercadoLibre had all the pieces in place to benefit from the stay-at-home orders resulting from the pandemic. It's also entirely likely that once consumers have adopted these next-generation technologies, there's simply no going back.
A word on valuation
It's worth noting that MercadoLibre's stock isn't cheap, according to traditional metrics. As of this writing, the stock trades at over 16 times forward sales estimates -- when a ratio of between one and two is considered typical -- so MercadoLibre's current share price reflects investors' high expectations for its future growth potential.
To put that into perspective, analysts are forecasting revenue growth of 33% for the current year with that figure accelerating to 37% next year, though MercadoLibre has consistently defied the odds and exceeded expectations.
Additionally, after a $750 million equity investment from PayPal, MercadoLibre has been spending heavily on advertising to increase its market share, a wise move considering the pandemic. As a result of the additional expenses, MercadoLibre isn't profitable, though profits should return in the next quarter or two, now that the company's recent ad campaign has concluded.
A second bite at the apple
Given the massive adoption of e-commerce and digital payments, how that trajectory has played out in the U.S., and the momentum that is now building in Latin America, it's clear that our Central and South American neighbors will be taking a similar path in the coming years. While there's simply no such thing as a "sure thing" in investing, this is probably as close as you'll get.
Even though MercadoLibre stock has already gained 73% so far this year, that could be just the beginning. The company has only scratched the surface in terms of online commerce, digital payments, and mobile point-of-sale. If you missed out on the chance to get in early on tech giants like Amazon, Shopify, PayPal, and Square, don't let this opportunity pass you by. Buy MercadoLibre.