Is MercadoLibre Stock a Buy Now?

MercadoLibre's (MELI 3.09%) stock jumped 9% during after-hours trading on Feb. 22 following its fourth-quarter earnings report.

The Latin American e-commerce company's revenue rose 61% year over year (74% in constant currency terms) to $2.13 billion, beating analysts' estimates by $120 million. Its net loss narrowed from $50.6 million to $46.1 million, or $0.92 per share, but missed the consensus forecast for a profit of $0.99 per share. Excluding income tax-related expenses in both periods, MercadoLibre's net loss narrowed from $44 million to $33.9 million.

Image source: Getty Images.

For now, the market seems to be ignoring all that red ink and focusing on its impressive top-line growth. So is it finally safe to invest in MercadoLibre, which lost more than 50% of its value over the past 12 months?

MercadoLibre's growth rates are accelerating again

On a constant currency basis, MercadoLibre's gross merchandise volume (GMV) rose 32% year over year to $8 billion as its total payment volume (TPV) on Mercado Pago increased 73% to $24.2 billion. Its total number of unique active users increased 11% to 82.2 million.

All three of those growth rates accelerated from the previous quarter, which finally ended its three straight quarters of decelerating growth.

Data source: MercadoLibre. Constant currency terms. YOY = Year over year.

That acceleration counters the bearish notion that MercadoLibre will struggle against difficult year-over-year comparisons in a post-lockdown world. It also indicates the company isn't ceding the Latin American market to aggressive challengers like Sea Limited's (SE 0.05%) Shopee.

MercadoLibre also generated robust GMV growth across its three largest markets -- Brazil, Argentina, and Mexico -- as its accelerating growth in Argentina offset slight slowdowns in Brazil and Mexico.

Data source: MercadoLibre. Constant currency terms. YOY = Year over year.

MercadoLibre didn't provide any forward guidance, but analysts expect its revenue to grow 33% in 2022 and rise 34% in 2023 in U.S. dollar terms.

That would represent a slowdown from MercadoLibre's 78% growth in 2021, but it's still an impressive growth rate for a stock that trades at less than five times this year's sales. Sea, which is expected to generate 46% revenue growth in 2022, also trades at five times that estimate.

Stabilizing gross and EBIT margins

MercadoLibre's gross and earnings before interest and taxes (EBIT) margins both declined sequentially but rose year over year in the fourth quarter.

Its gross margin stabilized as it benefited from more efficient shipping and the improved scale of its customer service, fraud prevention, and collection fees for processing payments. Its EBIT margin dipped throughout the year as it ramped up its marketing expenses and expanded its first-party marketplace, but its EBIT margin still expanded for the full year.

Data source: MercadoLibre. Constant currency terms.

Those improvements arguably make MercadoLibre a more stable investment than Sea, which operates at lower gross margins and relies heavily on a single video game (Free Fire) to offset Shopee's steep losses.

Analysts expect MercadoLibre's EBIT to rise 32% to $582 million in 2022, then grow 80% to $1.05 billion in 2023. We should take those long-term forecasts with a grain of salt, but they imply that its EBIT margin could rise from 6% in 2021 to 8% in 2023 -- even as it continuously expands its lower-margin first-party marketplace and fintech businesses.

Sea's EBIT is expected to remain deep in the red for the foreseeable future as it aggressively expands Shopee beyond Southeast Asia.

Should you buy MercadoLibre's stock?

MercadoLibre's lack of stable profits leaves it heavily exposed to rising interest rates, but the stock also hasn't been this cheap (relative to its trailing 12-month sales) since 2016. MercadoLibre's stock has skyrocketed more than 800% over the past six years, so this certainly seems like a good time to accumulate more shares if you believe in its long-term growth.

MercadoLibre's margins could be squeezed over the next few quarters as it ramps up its spending, but Morgan Stanley analysts still expect Latin America's e-commerce penetration rate to rise from 9% in 2021 to 16% in 2025, then jump to 50% over the next few decades. If MercadoLibre remains the top dog in this expanding market, it could still generate much bigger multibagger gains for investors who ride out the near-term volatility.