Valuations reached nosebleed levels during 2020, but 2021 saw these prices decrease. However, one stock sold off too much despite its success. MercadoLibre (MELI 0.87%) enables e-commerce to thrive in Latin America, and the business itself has been thriving.
MercadoLibre's valuation has reached the same bottoming point several times over the last five years. It recently hit that point again, which makes it my most wildly undervalued stock of 2022.
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Supporting e-commerce in Latin America
The e-commerce revolution has changed how U.S. consumers buy their goods. Several businesses like payment providers, shipping companies, and e-commerce platforms themselves have grown massively and generated huge shareholder returns through this change. MercadoLibre owns every one of these segments in Latin America, making it a fantastic investment opportunity.
It started in 2003 with Mercado Pago (its digital payment platform) and MercadoLibre (its classifieds page), much like Craigslist. Later, MercadoLibre expanded to include bidding elements like eBay (EBAY 1.09%) and a standard e-commerce platform like Amazon (AMZN 1.49%). In 2019, the e-commerce business was the largest of its kind in Latin America.
Mercado Pago found more uses than just MercadoLibre's platform. It can be used as a peer-to-peer payment platform and to buy and sell crypto in Brazil. Brick-and-mortar retailers also benefit and can accept Mercado Pago, allowing customers to go cashless. In Mexico, cash use decreased by 23% after Mercado Pago was introduced.
Another leg of the company is Mercado Envios, its logistics business. This allows sellers to seamlessly ship their goods after purchases are made. Businesses can even offer same-day or next-day deliveries using Mercado Envios Full when products are stored in MercadoLibre's warehouses; it's currently available in Mexico and Chile.
The results back up the opportunity
While MercadoLibre stock is off more than 30% from its highs, its business is growing quickly. During the third quarter, revenue was up 72.9% to $1.9 billion on a currency-neutral (FX) basis. Gross merchandise volume (GMV) rose 23.9% to $7.3 billion. Both are coming up against tough pandemic-driven comparisons. In 2020, its third-quarter revenue and GMV growth were 148.5% and 117.1%, respectively. As these comparisons fade away over 2022, look for MercadoLibre to continue reporting strong growth.
Examining individual segments in the third quarter reveals strength across the board. Mercado Envios had a remarkable 86% managed network penetration across all its markets, meaning it had a hand in 86% of some portion of the shipping process. Overall in Latin America, Envios is responsible for delivering over 37% of the items shipped in the region, with Envios itself fulfilling 65% of all packages delivered in Mexico. This demonstrates the outstanding market opportunity still left to capture.
Mercado Pago's total payment volume (TPV) grew an FX 59% to $20.9 billion during the third quarter. Its on-platform payments (those made directly interacting with MercadoLibre) only grew 29% and were used in 96% of transactions, meaning its growth will be tied into GMV. However, its off-platform payments rose 79% and captured a 64% market share, showing there is still room to grow.
Many Latin American countries have a rising middle class with growing disposable income, creating a growth catalyst for commerce in general. MercadoLibre is strategically positioned to capture or process much of the new wealth.
A historically low valuation
At a 9 times price-to-sales (P/S) ratio, MercadoLibre has reached a valuation not often seen over the last five years.
MELI PS ratio data by YCharts.
Each time it has reached this point, the stock has quickly rebounded to trade in the lower-teens range. Additionally, if MercadoLibre maintains its growth rate and valuation, the stock will appreciate identical to the revenue increase, an astounding investment proposition. However, the market could also be reevaluating its growth prospects, leading to a potentially lower valuation. Even if this happens, investors should stick with MercadoLibre, as growth will continue driving the stock price over the long term.
For how large MercadoLibre is, it doesn't generate a lot of profits. During the third quarter, it produced a net income of $1.92 per share or a 5.8% margin. This profit accounted for nearly three-quarters of all earnings so far in 2021. If MercadoLibre can turn the profitability corner, the market will recognize its achievement and value it differently throughout 2022. Also, it would separate MercadoLibre from other unprofitable growth stocks, and it likely wouldn't get dragged down as much during sell-off periods.
MercadoLibre is undervalued and might be worth purchasing as soon as possible to get the stock at the lowest price. Investors must be prepared for volatility, as it has seen multiple drawdowns of 30% or more, including a 45% decline this year. Even with these setbacks, holding on to MercadoLibre for multiple years has been a winning strategy. If you've missed out on its rise, now could be a great time to get in.
