The 1 Stock I'd Buy Right Now

Latin America has almost twice the population of the U.S., and 25% more internet users, but it's way behind in e-commerce adoption. In 2019, the region's online spending was only 4.4% of total retail sales versus 10.9% for the U.S., even though both geographies have around 200 million online shoppers today. In case you were wondering, you'd have to go back a decade to 2010 for the U.S.'s e-commerce spending to match the penetration Latin America has today.

As the coronavirus pandemic introduced the world to social distancing practices, Latin Americans, like others, have flocked to online retailers to purchase everyday goods. The region's e-commerce leader, MercadoLibre (MELI 0.87%), has stepped up to meet this incredible surge in demand, and its most recent quarterly results are jawdroppingly amazing as a result.

Even though the stock has doubled year to date, this quality operator is the one stock I'd buy right now. Let's take a deeper look at why.

It's an ecosystem

The first thing you need to know about MercadoLibre is that it's not just an e-commerce company. It has an ecosystem of six complementary services -- an e-commerce website, logistics services, payments, credit services, advertising, and a Shopify-like webstore builder. 

Image source: Getty Images.

The key to the company's success has been to focus on the Latin American region and build this comprehensive set of services which augment each other. Founded in 1999 as an e-commerce retailer, MercadoLibre soon realized that the lack of a bank account was keeping people from moving their purchases online. As a result, in 2003, it launched its payments service, Mercado Pago. As more sellers came to the platform, the company added tools to enable them to be more successful: Advertising services in 2009, shipping and logistics in 2013, and credit in 2017.

This regional ecosystem of services has been a winning formula for tremendous growth.

The business has had incredible growth

Over the last five years, the company has grown its top line at a 32% compound annual growth rate (in U.S. dollars) to $2.3 billion in 2019. But what's even more impressive is that it doesn't seem to be slowing down, especially when you look at it from a local currency perspective.

The most recent second-quarter results benefited from the stay-at-home-and-go-online trend with an incredible 123% top-line currency-neutral year-over-year growth. What's even more exciting for investors is that this triple-digit result is on top of a 102% currency-neutral year-over-year gain in the previous Q2.

Data source: MercadoLibre Q2 results presentation. Table and calculations by author. YoY = year-over-year. Note that marketplace revenue is made up of e-commerce and logistics, fintech accounts for the remaining services.

Marketplace revenues have benefited from the coronavirus surge to become two-thirds of the total, but the growth runway is long for both segments.

But the opportunity ahead is even bigger

MercadoLibre has e-commerce operations in 18 countries across the region, but three countries make up almost 95% of its revenue: Brazil (53% of total revenue), Argentina (27%), and Mexico (14%). You'll note from the table below that together, these three countries have a larger population than the U.S., almost as many internet users (260 million versus 290 million), but fewer than half the online buyers of their northern neighbor. Over its 20 years in the region, MercadoLibre has set up an extensive fulfillment and logistics network to ensure its new and existing e-commerce shoppers have a great experience. As the coronavirus encourages people to try its online offerings, I suspect they will become hooked on its convenience and value.

Data source: MercadoLibre investor presentation. Note: The company did not provide regional totals for bankarized and debit card ownership. Table by author.

The market for its e-commerce offerings is tremendous, but it just might be outdone by the opportunity to provide banking and payment services for the region. In the three focused countries in the table above, 30% to 63% of consumers don't have a bank account and 41% to 75% don't have a debit card. With Mercado Pago's growing credibility, transactions outside of its e-commerce marketplace now make up a majority of the payment volume. Last quarter it surpassed 52 million payers, with an incredible off-platform year-over-year growth of 175% in local currency payment volume to $6.1 billion (54% of the $11.2 billion total).

Even though payments are a huge untapped market, it has its sights set on an even bigger prize. In its annual financial filing, management stated that it envisions Mercado Pago as a "powerful disruptive provider of end-to-end financial technology solutions." Given what the company has accomplished so far, there's no doubt it can succeed in the fintech space too.

The takeaway for investors

This stock has been on a tear this year, and given its rise, some may think this business is too pricey at a price-to-sales ratio of 19 and a four-digit price-to-earnings ratio. But I'm more inclined to agree with a fellow writer who called MercadoLibre a "once-in-a-generation" opportunity. The last quarter's stellar performance has shown it has built a rock-solid business that will be able to continue to capture market share for years and even decades into the future. 

Amazingly, the investors seemed to yawn at the most recent quarterly results, and the stock has taken a bit of a step back as a result. I see this as an opportunity. This proven market leader with a massive growth runway ahead is the one stock I would buy right now.