While the broader market generally posts annual gains, individual stocks don't have as much predictability. Growth stocks in particular can be volatile as they work to gain a footing. While they might offer fantastic gains, they can sometimes end up in a slump.
MercadoLibre (MELI -1.98%) is a top e-commerce stock that underwhelmed investors in 2021, falling 19.5%. Even worse, the current stock price is down about 47% from 52-week highs set in mid-January.
Should that stock performance scare investors in 2022, or does it present an opportunity?
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What happened to MercadoLibre in 2021
MercadoLibre is an e-commerce and digital payments company based in Argentina that services users in 18 Latin American countries. It operates a large gamut of services tied to e-commerce and payments in a region with more than 600 million people and one of the fastest-growing internet penetration rates in the world.
Based on that, MercadoLibre is well-positioned for explosive success. It has a huge addressable market that it is uniquely suited to capture, and this market is rapidly adopting technologies that MercadoLibre provides.
MercadoLibre demonstrated tremendous growth when the pandemic started and shopping and payments moved more toward online alternatives. It posted triple-digit percentage revenue and total payment volume (TPV) growth for four consecutive quarters. That growth began to moderate in the second and third quarters of 2021, but business was still robust. In the third quarter, MercadoLibre's revenue increased 73% to $1.9 billion, and total payment volume rose 59% to $21 billion. Gross merchandise volume (GMV) reached a record $7.3 billion. There were more than 78 million unique active users at the end of the third quarter, up from 76 million last year. Keep in mind that these outstanding numbers were on top of last year's super growth, so the "moderation" figures were still enviable.
The only cause for concern was when MercadoLibre hit a snag in the fourth quarter of 2020 (reported on March 1, 2021) and the first quarter of 2021 when it posted an unusual loss, which it attributed to expenses related to loans, foreign exchange rates, and lower net interest income due to falling interest rates. But it got back to profitability in the second quarter.
In other words, it really was nothing short of a great year. But between slowing growth and a skyrocketing valuation, investors got scared off.
Why you can have confidence for this year
The company has been taking new directions recently, purchasing smaller companies and investing in new technology. In October, it partnered with Latin American venture capital company Kaszek to form a special-purpose acquisition company (SPAC) to invest in new technology. In November, it launched an alliance to combat counterfeit goods, and in December, it acquired Chilean payments company Redelcom to bolster its payments strategy. It has also upgraded its loyalty program to strengthen its connection to its customers and encourage more activity on its platform. Getting more customers to join also ties in its fintech services by enabling digital services associated with payments and delivery.
The company has been seeing phenomenal growth in its off-platform business, which encompasses transactions by users not using MercadoLibre's e-commerce services. MercadoLibre is the company's e-commerce business, similar to Amazon or eBay. It offers fintech features related to e-commerce transactions, but it also offers those fintech features for general usage by other retailers, consumers, and companies needing payments processing. Total payment volume for digital accounts, which comprise digital wallets, peer-to-peer transactions, and card transactions, increased 101% to $5.5 billion in the third quarter.
Management said that new user growth is still accelerating since the pandemic, and retention rates are stronger. Transactions per buyer are increasing, and the company's Net Promoter Scores, which measure how many people would recommend MercadoLibre to a friend, are at their highest levels.
The stock's valuation has become much more reasonable at the current price, with shares trading at 132 times forward 12-month earnings. That's not inexpensive, but it's also not outsized for a high-growth company.
MercadoLibre has been a fantastic stock to own, having gained more than 500% over the past five years and easily beating the market on a long-term basis.
MELI data by YCharts.
At this price, and with its opportunities, MercadoLibre looks like a great buy for 2022.
