MercadoLibre's (NASDAQ:MELI) stock price rose 5% on Nov. 5 after the Latin American e-commerce giant posted its third-quarter earnings.

Its revenue rose 66% year over year (73% on a constant currency basis) to $1.86 billion, which narrowly missed estimates by $30 million. However, its net income skyrocketed more than sixfold to $95.2 million, or $1.92 per share, which easily beat expectations by $0.63 a share. Excluding income tax expenses, its net income increased 139% to $126.1 million.

MercadoLibre's growth rates were impressive, but should you buy its stock as reopening trends curb the market's appetite for e-commerce investments?

A tiny parcel with a Brazilian flag, in a miniature shopping cart on top of a laptop.

Image source: Getty Images.

Is MercadoLibre's growth slowing down?

MercadoLibre's year-over-year growth in gross merchandise volume (GMV), total payment volume (TPV), unique active users, and total revenue all decelerated significantly from the previous quarter and a year earlier:

Growth (YOY)

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

GMV

117%

110%

114%

46%

30%

TPV

161%

134%

129%

72%

59%

Unique Active Users

92%

71%

62%

47%

3%

Revenue

148%

149%

158%

103%

73%

Source: MercadoLibre. Constant currency terms. YOY = Year over year.

However, MercadoLibre's ability to generate high double-digit percentage GMV and TPV growth against its triple-digit percentage growth last year was still impressive. Its three largest markets -- Brazil, Argentina, and Mexico -- also generated impressive growth against its pandemic-induced tailwinds last year:

Growth (YOY)

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Brazil

112%

120%

139%

101%

69%

Argentina

260%

229%

223%

112%

83%

Mexico

140%

155%

148%

76%

76%

Source: MercadoLibre. Local currency terms.

During the conference call, CFO Pedro Arnt said that even though MercadoLibre faced its "toughest year-over-year growth comparisons" during the third quarter, it still achieved "new records in gross merchandise volume, payment volumes, and credit portfolio size."

Arnt noted that MercadoLibre's engagement and satisfaction rates were "improving sequentially for both commerce and fintech services" even after it significantly expanded its active user base throughout the pandemic.

Arnt said its e-commerce marketplace, which ended the third quarter with 38.6 million unique buyers, experienced "higher levels of engagement with increasing transactions per unique buyer sequentially." It also gained more buyers "compared to the periods before the pandemic" and achieved "better retention levels" for all of its buyers.

Like Amazon (NASDAQ:AMZN), MercadoLibre is highlighting its two-year compound annual growth rates (CAGR) as a better measure of its post-pandemic growth. On a two-year basis, its GMV increased at a CAGR of 73% on a constant currency basis in the third quarter, compared to its 74% CAGR in the first and second quarters of the year.

Stable margins and rising profits

MercadoLibre's gross and operating margins dipped sequentially in the third quarter, but still expanded from a year ago:

Metric

Q3 2020

Q2 2021

Q3 2021

Gross Margin

43%

44.3%

43.4%

Operating Margin

7.4%

9.8%

8.6%

Source: MercadoLibre. Local currency terms.

MercadoLibre's gross margin faced some pressure from rising interest rates in Brazil, but it countered those headwinds by diversifying its funding sources and raising some prices.

Its operating margins were squeezed by the expansion of its first-party marketplace and logistics network, but it offset that pressure by reducing the costs of its payment collection fees and customer service platform. 

Those margins look stable, but the major contributor to its 533% jump in net income was a retroactive tax benefit in Argentina, which boosted its net margin 380 basis points year-over-year to 5.1%. Excluding that non-recurring benefit, its net margin would have been closer to 2%.

It's still reasonably valued relative to its growth potential

MercadoLibre didn't provide any guidance for the fourth quarter, but analysts expect its revenue to rise 72% in USD terms for the full year. Next year, they expect its revenue to grow another 39% even as it continues to face tough year-over-year comparisons. Based on those forecasts, MercadoLibre trades at less than nine times next year's sales. That price-to-sales ratio is low compared to many other high-growth tech companies.

It's also cheap relative to the growth potential of the broader Latin American e-commerce market. Morgan Stanley analysts expect the region's e-commerce penetration to increase from just 9% this year to 16% in 2025, then possibly soar to 50% over the next few decades.

It's still the right time to buy MercadoLibre

MercadoLibre's stock has stayed nearly flat this year as investors have pivoted from e-commerce stocks toward reopening plays.

However, MercadoLibre continues to grow even as its pandemic-related tailwinds wane, and its stock gets cheaper each time inventors underreact to its impressive earnings reports. Therefore, I believe it's still a great time for long-term investors to pick up more shares of MercadoLibre.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.