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Is MercadoLibre a Buy?

By Justin Pope – Aug 18, 2021 at 1:50AM

Key Points

  • E-commerce and payments continue to drive growth for MercadoLibre, which posted strong Q2 numbers.
  • The digital economy has a long growth runway in Latin America, and MercadoLibre will play a key role in that expansion.
  • The stock is less expensive than before the pandemic, which makes it a solid deal for investors today.

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MercadoLibre showed its strength in its recent quarterly earnings, and there could still be upside ahead for investors.

Latin American e-commerce giant MercadoLibre (MELI 4.05%) recently reported earnings for its second quarter of 2021. Investors liked what they saw, and the stock jumped 15% in a short amount of time.

It can feel like "chasing" when you buy a stock after a large jump in price, but here are three reasons why MercadoLibre may still have more upside ahead.

1. Strong momentum in e-commerce and payments

MercadoLibre posted 2021 second-quarter revenue of $1.7 billion and earnings per share of $1.37, beating analyst expectations by 15% and 637%, respectively. Revenue grew 102% year over year (not factoring in currency exchange rates), which is impressive considering that the company was coming off of strong growth in 2020 due to the COVID pandemic.

MercadoLibre's e-commerce marketplace and payments network (Mercado Pago) continue to show strong growth. The total value of items sold in the marketplace during the second quarter of 2021 grew 46% year over year, compared to the height of the first pandemic wave in 2020. In Mercado Pago, total payments volume grew 72%, again despite tough comparables with the second quarter of 2020.

Two women scanning a bill into a digital bank app.

Image source: Getty Images.

Latin America, like much of the world, is an emerging market rapidly evolving toward an internet-driven economy. MercadoLibre is a local, trusted brand that has been around since its founding in 1999, and a household name among most consumers in the region. With e-commerce and digital banking at the forefront of the digital economy, MercadoLibre is well positioned to ride growth as the overall Latin American economy matures.

2. A tremendous runway ahead

To see the long-term opportunities in MercadoLibre, investors need to understand just how much room there still is for the internet to penetrate Latin America. The pandemic pushed e-commerce sales to $100 billion for the first time in 2020, but e-commerce still represents just 5% of total retail activity throughout the region.

Meanwhile, in banking, a pre-pandemic study indicated that as much as 70% of the population in Latin America is either unbanked or underbanked, meaning they don't have the proper infrastructure in place to store and move money. As a result, nearly 85% of the transactions in Latin America are done in cash.

It's estimated that by 2025 there will be 423 million mobile internet users in Latin America, which would still only be 64% of the population. Companies like MercadoLibre are bringing these people integrated solutions. As internet access continues to penetrate the region, consumers will have access to e-commerce and digital banking, which can spread more quickly than brick-and-mortar banks.

3. The stock is still attractively valued

The pandemic has accelerated the growth of many digital companies like MercadoLibre, and stock valuations have generally increased as a result. However, MercadoLibre has been a bit of an exception. The stock traded at a price-to-sales ratio of 19 in July 2019, before COVID, and now trades at a P/S of 13 if we use the company's expected 2021 revenue of $6.9 billion.

In other words, the stock has somehow gotten less expensive, despite a beneficial environment that has boosted the company's revenue growth to 102% as of Q2. Investors might be wary of revenue growth slowing down next year, after seeing such a large jump during the pandemic. However, MercadoLibre is still expected to grow revenue by 30%, to more than $9 billion in 2022.

Why MercadoLibre has a ton of potential

MercadoLibre is wired into the growth of the digital economy of Latin America. Its marketplace and Mercado Pago payments network are central to digital commerce for consumers, and the region is still in the early chapters of this growth story.

While MercadoLibre isn't an "under-the-radar" name in the investment community -- its market cap is about $90 billion -- there could still be a lot of upside for long-term investors.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends MercadoLibre. The Motley Fool has a disclosure policy.

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