MercadoLibre's (NASDAQ:MELI) stock soared nearly 1,000% over the past five years as the Latin American e-commerce leader repeatedly dazzled investors with its robust growth in users and revenue.
However, MercadoLibre's profits remain slim, and its stock looks frothy at over 400 times forward earnings. So can MercadoLibre continue growing over the next five years?
Understanding MercadoLibre's core business
MercadoLibre was founded 21 years ago in Argentina. eBay owned nearly a fifth of the company before selling most of its stake in 2016, but it still partners with MercadoLibre to help overseas sellers enter Latin America.
MercadoLibre operates in 18 countries, but its top three markets are Brazil (65% of its revenue last quarter), Argentina (19%), and Mexico (12%). Its dominance of those markets prevents multinational challengers like Amazon (NASDAQ:AMZN) from gaining much ground in Latin America.
MercadoLibre opened its first local fulfillment centers in Brazil, Argentina, and Mexico last year, and it's currently building new centers in Chile and Colombia to expand that first-party logistics network.
MercadoLibre generates nearly two-thirds of its revenue from commissions on its e-commerce marketplace. The rest mainly comes from its fintech business, which includes its Mercado Pago digital payments platform.
How fast is MercadoLibre growing?
MercadoLibre had 144.6 million registered users at the end of 2015. That figure rose to 320.6 million by the end of 2019, and it added another 46.8 million registered users in the first nine months of 2020.
Its total number of unique active users, which it considers a more accurate growth metric, rose 84% year-over-year to 112.5 million in the first nine months of the year. Its GMV (gross merchandise volume) grew 42% year-over-year during that period, its TPV (total payment volume) jumped 71%, and its total revenue rose 63% to $2.65 billion.
Like many other e-commerce companies, MercadoLibre's sales were boosted by pandemic-induced online purchases over the past year. Analysts expect its revenue to rise 66% this year, then decelerate to 36% growth next year as the pandemic passes.
MercadoLibre's profitability has been unpredictable over the past five years, mainly due to ongoing investments and free shipping subsidies. However, it still generated a net profit of $50 million in the first nine months of 2020, compared to a net loss of $118 million a year ago, as its revenue easily outpaced its expenses. Analysts expect MercadoLibre to generate a full-year profit this year, and for that profit to more than double next year.
Riding long-term secular tailwinds
Many Latin American countries are struggling with tough economic headwinds, but the region's e-commerce sales should keep rising.
eMarketer expects Latin America's annual e-commerce sales to rise 19% to $83.6 billion in 2020, and climb toward $116.2 billion in 2023. The firm expects 10.8 million customers across Latin America to make their first digital purchases this year as brick-and-mortar stores shut down during the pandemic, and that secular shift should continue long after the crisis ends.
eMarketer also expects Latin America's total retail sales to rebound to pre-pandemic levels by "early to mid-2022." As those brick-and-mortar retailers recover, MercadoLibre will continue to expand its reach with Mercado Envios Flex, an extended delivery system that's similar to Amazon Flex; new fulfillment centers; and Mercado Pago. It could also gradually expand into online groceries, a market which it's avoided thus far due to logistics challenges.
MercadoLibre is also expanding its ecosystem beyond its core marketplace with APIs (application programming interfaces), which allow third-party apps and websites to access its e-commerce and payment services.
But mind the currency headwinds
MercadoLibre's core business should remain strong over the next five years, especially as Amazon remains an underdog in Latin America. However, it will still face tough currency headwinds in its core markets.
For example, MercadoLibre's reported revenue rose 85% year-over-year to $1.12 billion in the third quarter. But on a constant currency basis, its revenue rose 149%. It generated a net profit of $15 million during the quarter, but only after it lost $30.4 million to unfavorable currency headwinds.
That pressure could intensify if Latin American currencies continue to decline against the U.S. dollar. MercadoLibre's robust revenue growth could keep offsetting those currency headwinds, as it did over the past five years, but they'll continue to dilute its returns for U.S. investors.
Where will MercadoLibre be in five years?
MercadoLibre's stock isn't cheap relative to its earnings, but it's not that pricey relative to its top line at 12 times next year's sales. Over the long term, MercadoLibre should keep growing as it ramps up its presence in newer markets like Chile and Colombia and more Latin American shoppers buy products online.
The geopolitical and economic risks across Latin America won't fade anytime soon, but MercadoLibre's strengths should offset those macro challenges and propel its stock higher over the next five years.