With MercadoLibre Revenue Up 89%, Is Now the Time to Invest?

MercadoLibre's (MELI -1.01%) marketplace gets over 600 million visits per month. In this clip from "The 5" on Motley Fool Live, recorded on Jan. 18, Motley Fool contributor Trevor Jennewine analyzes the e-commerce powerhouse's financials and discusses why the stock could be a good fit for growth investors.

Trevor Jennewine: I think most Foolish investors are familiar with MercadoLibre (MELI -1.01%). This is the largest e-commerce and fintech ecosystem in Latin America. They operate across 18 different countries in the region. In addition to that marketplace and the fintech platform, the company's portfolio also includes shipping and fulfillment services, financing, digital advertising tools, and software that helps merchants to build their own online storefronts. MercadoLibre really has this comprehensive ecosystem that's designed to really facilitate commerce. In terms of inflation, the way that the company generates revenue, they take a percentage of that gross merchandise volume, so the total sales moving across the platform, then when a merchant uses the fintech platform, they take a percentage of the total payment volume. The chart on the right hand side of the slide show the company's GMV and TPV over the last several years, and they also do a year-over-year comparison. You can see that year-over-year for fintech take rate up a little bit, 3% versus 2.7%. The gross merchandise volume are valued. The take rate there is rising more quickly, 16.7% in the most recent quarter, up from 12.3%. To me, that evidence is the value that MercadoLibre creates for its clients. The fact that it is able to take more money off the top means that it must be providing some type of valuable service.

When you look at the company's competitive edge, MercadoLibre's marketplace gets about 668 million visits per month, according to web retailer. The next closest competitor in the region is Amazon (AMZN -2.56%), with 169 million visits per month. That supercharges the network effect that you get with any marketplace style business model. Merchants are going to choose the platform that will reach the most consumers. That means you're going to have more merchants listing items on MercadoLibre, which serves to improve the product selection. That's convenient because consumers want to shop on the platform that has the best product selection, so that's going to draw more consumers to the marketplace and it creates this flywheel effect that strengthens itself. Additionally, all the services that I mentioned, shipping, fulfillment, financing, digital advertising tools, that ecosystem is very sticky. The more products that a merchant uses, the harder it becomes to cut ties with MercadoLibre, so you get high switching costs. That's exactly what's happening. In the most recent quarter, 97% of items were shipped through the company's logistics business. That's up from 92% last year. Total payment volume was up 44%. Gross merchandise volume was up 24%. The company said its credit portfolio grew nearly fourfold in the quarter. Some merchants are adopting those services and that does make its platform stickier every time.

The company's financial performance looks strong, $6.3 billion in revenue over the past year, that's up 89% profitable on a GAAP basis. They generated $78 million, almost $79 million net income. That's up from a loss of $4.1 million in the prior year. Free cash flow negative right now primarily due to two different things. Funds payable to customers decreased and credit card receivables increased. Neither of those things are particularly concerning. They're all related to timing. Just means that when the quarter ended, the most recent quarter ended, MercadoLibre was holding less cash that it owed to customers, and it also had received less cash that it is owed from credit card payments. The company is going to get that money eventually. I pay attention to free cash flow. You want that number to be positive and growing. But I'm not too concerned that it has dipped negative recently. The stock is down 44% from its high. The company has a market cap of $55 billion right now. I think over the next decade, the stock could grow fivefold, maybe even tenfold. If you're looking for a short-term reason to invest, I do think it can work as maybe a hedge against inflation, but over the longer term, I certainly like the company.