Is It Too Late to Buy MercadoLibre Stock?

Shares of MercadoLibre (MELI -0.03%), the top e-commerce company in Latin America, have risen nearly 2,700% over the past 10 years. The Argentina-based company was founded over two decades ago, and it's leveraged its first-mover's advantage to expand across 18 Latin American countries.

It repeatedly dazzled investors with its robust growth, the relentless expansion of its logistics network, and the stickiness of its Mercado Pago digital payments platform. MercadoLibre's growth accelerated throughout the pandemic, and its recent second-quarter report -- which featured its fifth straight quarter of triple-digit percentage year-over-year local currency sales growth -- indicates it's still firing on all cylinders.

Image source: Getty Images.

However, investors might be hesitant to buy its high-flying stock, which trades at more than 400 times forward earnings and 14 times this year's sales. Is it too late to buy MercadoLibre, or is it still a sound investment on Latin America's booming e-commerce market?

How fast is MercadoLibre growing?

A look back at MercadoLibre's year-over-year growth in gross merchandise volume (GMV), total payment volume (TPV), unique active users, and total revenue in local currency terms over the past year reveals just how much its growth accelerated throughout the pandemic.

Data source: MercadoLibre. Local currency terms. YOY = Year over year.

MercadoLibre generates most of its revenue in Brazil, Argentina, and Mexico. Here's how rapidly those three core markets grew.

Data source: MercadoLibre. Local currency terms. YOY = Year over year.

MercadoLibre's growth rates are still impressive, but it will inevitably face tougher year-over-year comparisons as COVID-19 restrictions are relaxed. However, MercadoLibre's GMV is still growing on top of its impressive growth throughout the pandemic -- so its business isn't slowing down at all.

MercadoLibre also has plenty of room to grow. In the latest conference call, CFO Pedro Arnt cited a recent eMarketer report that named "Latin America as the leading region in the world for e-commerce sales growth, with almost 10 percentage points higher projections than the worldwide average." The firm also named Brazil, Argentina, and Mexico as three of the world's five highest-growth e-commerce markets.

How is MercadoLibre widening its moat?

MercadoLibre's main defense against overseas challengers like Amazon (AMZN -0.99%) and Sea Limited's (SE -0.69%) Shopee is its self-managed Mercado Envios logistics network, which allows it to ship products across challenging terrains and underdeveloped regions.

Mercado Envios handled 83% of its deliveries in the second quarter, up from just over 50% a year ago, and now enables MercadoLibre to fulfill most of its deliveries in just 1.5 days. 

Mercado Pago, which processes digital payments for its own marketplace and external businesses, also locks in its users and further widens its moat. During the second quarter, Mercado Pago's TPV growth of 72% represented nearly 730 million total transactions. Its off-platform TPV grew 94% year over year.

Mercado Pago also offers investment accounts in its mobile wallet. It ended the second quarter with over 19 million active investment accounts -- up from 11.4 million a year ago and 15.7 million in the first quarter. That sprawling fintech ecosystem makes it a promising long-term play on the "war on cash." 

What are the biggest threats to MercadoLibre?

The biggest threat to MercadoLibre is the rampant inflation across Latin America, which throttles its year-over-year growth in USD terms. For example, MercadoLibre's revenue rose 127% on a constant currency basis in 2020, but only increased 73% on a reported basis in USD terms.

Analysts expect MercadoLibre's revenue to rise 58% in USD terms this year, but the unpredictable currency headwinds suggest investors shouldn't put too much faith in that forecast.

Social unrest could also curb MercadoLibre's growth and expansion plans in certain countries. For example, it's been opening more IT and distribution centers in Colombia -- but that expansion could be derailed by violent protests across the country over pandemic-related taxes. MercadoLibre could also face antitrust challenges as it widens its lead against smaller regional rivals and overseas challengers.

Why it isn't too late to buy MercadoLibre

I don't think it's too late to buy MercadoLibre. Brazil, MercadoLibre's largest market, still only has an e-commerce penetration rate of 12.5%, according to data from Fidelity International, BTG Pactual Research, and Euromonitor -- compared to penetration rates of 27.3% in China and 20.3% in the U.S.

MercadoLibre's other markets likely have even lower penetration rates. Therefore, it wouldn't be surprising to see MercadoLibre's number of unique active users (75.9 million as of the second quarter) and its total addressable market more than double within a few years.

MercadoLibre's profits are still slim, but its stock is still slightly cheaper relative to its sales than Sea, which trades at 19 times this year's sales. Its stock could remain volatile, but I expect the company -- which has an enterprise value of $89 billion -- to grow much larger over the next few years.