Is MercadoLibre Stock a Buy?

MercadoLibre (MELI -1.96%) operates in two quickly growing markets: e-commerce and digital payments. Last year, both of those industries saw rapid expansion as the coronavirus forced consumers to shelter at home.

Not surprisingly, its investors have faired quite well -- shares of MercadoLibre jumped 165% over the past 12 months, and 365% in the last three years. But after those big gains, is the stock still a buy? Let's take a look.

MercadoLibre's two-pronged approach: Commerce and payments

Over the last two decades, MercadoLibre's business has transformed from an online marketplace serving various Latin American markets into a commerce-centric ecosystem. In addition to its e-commerce business, the company also offers fintech services (Mercado Pago), logistics solutions (Mercado Envios), financing (Mercado Crédito), and other products to support its sellers.

Image source: Getty Images

Together, MercadoLibre's various businesses create an end-to-end solution, simplifying virtually every aspect of retail. To make a loose analogy, MercadoLibre is similar to Amazon, since it operates a vertically integrated marketplace that also provides fulfillment and shipping solutions, as well as advertising services.

However, it's also similar to Shopify or Square. Mercado Pago allows merchants to accept in-store and online payments, Mercado Crédito provides loans and cash advances, and Mercado Shops offers a software-as-a-service platform that enables sellers to create and manage digital storefronts.

Today, MercadoLibre operates in 18 Latin American countries, though its operations are focused on three geographies: Argentina, Brazil, and Mexico. According to Statista, digital payments in these countries will reach $172 billion in terms of transaction volume this year. Likewise, eMarketer estimates that e-commerce sales in Latin America will reach $94.7 billion in 2021.

Here's the takeaway: This commerce and payments giant has a big market opportunity.

MercadoLibre has market leadership in Latin America

MercadoLibre is the largest fintech platform and the leading e-commerce marketplace in Latin America. To put numbers behind that words, 5.8 billion people visited MercadoLibre's marketplace in 2020, while the next-closest competitor -- which happens to be Amazon -- drew 2.7 billion visitors in those competing markets.

That scale gives MercadoLibre a cost advantage. It sells more items, facilitates more transactions, and makes more money, meaning it has more cash to reinvest and grow its business.

Moreover, MercadoLibre's businesses benefit from a network effect that should strengthen its competitive position over time. As more consumers join, MercadoLibre and Mercado Pago become more valuable to all merchants, because they have access to more buyers. And as more merchants join, those platforms become more valuable to all consumers, because they have more options.

As a caveat, Amazon is much larger than MercadoLibre when you factor in its operations outside of Latin America. But even if Amazon decides to aggressively pursue this market, MercadoLibre has been building out its payments ecosystem since 2003, and its logistics network since 2013 -- so there's no guarantee Amazon would win.

MercadoLibre's financial performance is strong

MercadoLibre's strong value proposition for both merchants and consumers and its dominant market position have led to stellar financial performance.

Last year, gross merchandise volume (the value of all goods sold on its marketplace) reached $20.9 billion, up 50% from 2019. Likewise, the number of payment transactions on Mercado Pago more than doubled, bringing total payment volume (TPV) to $49.8 billion, up 75% over the prior year.

Also noteworthy, the percentage of items sold on MercadoLibre that were also shipped through Mercado Envios hit 90% in 2020, up from 81% in 2019.

In total, revenue from MercadoLibre's commerce business surged 90% in 2020, while revenue from its fintech business jumped 49%. That impressive growth was undoubtedly influenced by the pandemic, but MercadoLibre has also wowed Wall Street over a longer time period, too.

Data source: MercadoLibre SEC filings. CAGR = compound annual growth rates.

Even with its past performance, MercadoLibre isn't sitting still. The company continues to invest heavily in growing its business. And in the years ahead, those investments should carry the company to greater success.

The benefits outweigh the risk with this stock

MercadoLibre currently trades at 20 times sales, which is certainly high, but it's not outrageous. For reference, Amazon currently trades at 4.7 times sales and Shopify has a price-to-sales ratio of 52. In general, this skews MercadoLibre toward the risky side of the spectrum.

Investors should also note that political volatility in Latin America introduces an element of risk. For instance, MercadoLibre decided to deconsolidate its Venezuelan operations at the end of 2017, recording an $85.8 million loss in the process, after various operating restrictions "significantly hindered" its ability to make key financial decisions. In this case, I believe the benefits are more pronounced. 

However, there are risks with any investment. The stock is in growth mode and trading is somewhat volatile. The current price is down 22.2% from its 52-week high set back in late January.

MercadoLibre's stock price will recover. The company has carved out a solid competitive position, and it operates in two high-growth markets. That's why I'm a shareholder, and I have no plans to sell. Even after the incredible gains in recent years and the recent price drop, I think MercadoLibre has a bright future.