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Is MercadoLibre Stock a Buy?

By Will Healy – Aug 2, 2020 at 10:00AM

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A surging stock price leads to both optimism and questions about the Latin American e-commerce giant.

MercadoLibre (MELI) is not exactly a household name in the U.S. However, many who engage in e-commerce south of the border approach this company as Americans do Amazon. As Latin America's leading e-commerce platform, it operates in 18 countries spanning from the company's base in Argentina to Mexico.

Now, a recovery from March lows has taken MercadoLibre stock to new all-time highs. Given this recent trading, the question for investors hinges on whether MercadoLibre is due for a pullback or if it has room to move higher.

MercadoLibre's business

MercadoLibre acts as a sort of hybrid of eBay and PayPal, serving as both an online marketplace and payments facilitator. Not only does MercadoLibre sell its own items, it can also serve as a storefront for small enterprises across Latin America to operate their own e-commerce businesses.

To make e-commerce succeed in cash-based societies, MercadoLibre has become a leader in fintech. Consequently, the company offers payment processing, credit, and mobile payments. For those short on cash, it can provide working capital loans and cash advances.

Young woman with laptop on her lap holding a credit card as she shops online.

Image source: Getty Images.

Additionally, it has invested heavily in logistics. However, in some of its markets, infrastructure presents a challenge. At times, some countries that it serves also face fluctuating currency values and political instability.

Nonetheless, this e-commerce and payments giant holds tremendous potential in Latin America. In its three largest markets, Argentina, Brazil, and Mexico, it has not yet attracted the percentage of online buyers seen in the developed world. It also lags both China and India in this regard.

However, MercadoLibre has faced an increasing threat from Amazon in recent years, especially in Brazil, its largest market. Last year, Amazon launched its Prime service in Brazil, offering unlimited shipping, Prime Video, Prime Music, and other services. MercadoLibre had already offered free shipping for some orders. Still, Amazon is approximately 30 times the size when measured by market cap, and the global e-commerce leader has the resources to challenge MercadoLibre on its home turf.

MercadoLibre and its stock

Like most stocks, MercadoLibre fell significantly in February and March, losing over 40% of its value. However, since then, it has refound its footing, rising by about 150% over the last four months.

Now, investors have to decide if MercadoLibre is a buy in the $1,100 per share range. Although analysts forecast earnings of $1.06 per share in 2021, the company has not generated an annual profit since 2017. Moreover, the stock trades at 22 times sales.

MELI Chart

Data by YCharts.

While its sales multiple may be high, the growth numbers could offer some justification for that valuation. Net revenue increased by 70.5% year over year on a currency-neutral basis. Total payment volume and gross merchandise volume also rose by 82.2% and 34.2%, respectively. 

In the first-quarter report, MercadoLibre reported declining interest in certain non-essential items. However, marketplace key performance indicators (KPIs) showed a rebound, and they did not report any increase in non-performing loans.

The company will release second-quarter earnings on Aug. 6. Investors will have to follow that report closely to fully grasp the pandemic's effects on the company.

Still, sales levels in Mexico appear promising. According to Mexican publication Milenio Diario, pharmacy sales in Mexico rose by 114%, while home and laundry sales increased by 403%. This could serve as an indication of what occurred in the company's other markets.

Should investors buy?

Despite increasing competition from Amazon in Brazil, the company's massive growth shows few signs of slowing down. However, the consumer discretionary stock is priced to perfection. Even if 2021 earnings meet the $1.06 per share consensus, the stock's price-to-earnings ratio comes out to more than 1,000 as of this writing.

In that light, MercadoLibre stock appears to have moved ahead of itself. Investors should wait for a better entry point before taking a position.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, MercadoLibre, and PayPal Holdings. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay, short January 2021 $37 calls on eBay, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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