Latin American e-commerce giant MercadoLibre (MELI -1.01%) is a popular stock among growth investors. It's returned nearly 3,750% since its 2007 IPO, turning a $10K investment into close to $400K. Could 2022 be the best year yet to buy shares, even after all this success?
MercadoLibre is operating at a high level and enjoys massive tailwinds that could keep the business in hypergrowth mode for years to come. But thanks to a market-wide sell-off of tech stocks, investors have turned away from the stock. Here's what you need to know.
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MercadoLibre stock is on sale
It's been one heck of a ride if you've held shares of MercadoLibre over the past couple of years. The chart below uses a price-to-sales (P/S) ratio to measure the stock's valuation. Shares have fallen from their highest-ever valuation to nearly their lowest-ever in less than two years.
MELI PS Ratio data by YCharts
What I find interesting about the stock's current valuation is that the company's revenue growth is higher than it has been at most points in MercadoLibre's history, making the low P/S ratio even more glaring.
It's one thing to have a lower valuation when revenue is growing 15% to 30% per year like it was between 2010 and 2020, but with 66% growth, one could argue that a higher P/S ratio is justified. Most growth investors are probably familiar with the steep sell-off going on across most tech and growth stocks in the market, so it's hard to point the finger at anything specific in MercadoLibre to explain the price action. Instead, one can look at the business fundamentals to see whether the stock's low valuation is an opportunity or a trap.
E-commerce tailwinds remain strong
It might be weird to think that a stock that's become a 40-bagger since its IPO has a ton of room to run, but I think MercadoLibre does, as it has turned itself into a central cog of the economy in Latin America. MercadoLibre has an estimated 25% market share of all e-commerce transactions in the region.
Perhaps the more impressive statistic is that e-commerce contributed just 5% of total retail transactions in Latin America in 2020. E-commerce is at the bottom of the first inning in this ball game, which gives MercadoLibre a massive runway to future growth.
In the third quarter of 2021, its most recent quarter, MercadoLibre's gross merchandise volume, the value of all transactions on its e-commerce platform, was $7.3 billion. That's a 30% year-over-year increase. Nearly 30% of the population in Latin America still doesn't even have internet. As the region develops the technology to shop online and make digital payments, MercadoLibre should directly benefit.
Fintech business could supercharge growth
MercadoLibre isn't just sitting around waiting for this growth. The company has evolved and developed a thriving fintech segment, which provides MercadoLibre users with various digital payment services, including making electronic payments, peer-to-peer payments, digital wallets, insurance, and lending.
Fintech revenue grew 71% year over year in 2021 Q3 to $633 million, representing about one-third of MercadoLibre's total revenue. The growth rate roughly matches e-commerce in the quarter, showing how both segments are executing well. MercadoLibre would be a good investment for its e-commerce business alone. However, the fintech side of the company is much newer and could potentially become larger than e-commerce over time.
User growth is strong for the fintech business. Digital wallet accounts grew 22% year over year in 2021 Q3, and investment accounts grew 51%. Compared to the 10% growth of e-commerce buyers, the fintech business seems to be picking up users faster, and I think that user growth could be a future indicator of revenue growth to come.
Putting it all together
MercadoLibre has evolved so much over the years, from building up its e-commerce business to now using it to enter and expand on new business segments. Combining e-commerce and fintech gives the company so much growth upside in Latin America. This huge emerging market could further enter the digital age over the next decade and beyond.
I feel pretty confident that MercadoLibre will continue to serve its customers, guiding them to the internet economy. That's why the inexpensive stock could be such a great buying opportunity right now. It may take time and patience, but investors with a long-term mindset could see the stock continue delivering substantial gains well into the future.
