The stock market often doesn't make much sense in the short term. Emotions like fear and greed make it so unpredictable. Fortunately, a company's fundamentals can act like a compass, helping the market arrive at its senses over the long term, rewarding the companies that continue executing and growing while punishing the less deserving.
E-commerce company MercadoLibre (MELI +1.42%) has been punished by the market, down more than 15% over the past year. But rather than throw in the towel, I see reasons for optimism. Here are three reasons why I think the market will eventually come around to MercadoLibre and reward patient investors.
NASDAQ: MELI
Key Data Points
1. Strong business execution
MercadoLibre is an e-commerce company at its core and has been working at it since being founded back in 1999, the turn of the millennium and rise of the dot-com era. It's not an overnight sensation but rather a steady grinder that's been investing in building the logistics, distribution, and market presence to be the force in Latin America that it is today.
Image source: Getty Images.
MercadoLibre had 82 million unique active users at the end of 2021, an impressive feat in a region that features fragmented populations and an emerging economy compared to the United States. Things like banking and the internet are not as much as a given like they are in America.
According to estimates by eMarketer, MercadoLibre is the clear e-commerce leader in the region; it put MercadoLibre's sales at almost the same as its six competitors added together. This dominance in e-commerce has opened up opportunities for MercadoLibre to expand into other businesses, like financial services.
MercadoLibre's execution shows up in its revenue growth, accelerating despite growing larger every year. The company has grown revenue at an average of 37% annually over the past decade, but that average growth rate is 53% over the most recent five years and 70% over the past three.
2. Tailwinds for future growth
There are many ways that MercadoLibre could keep growing over the coming years. Latin America has roughly 664 million people, which means that MercadoLibre has a long runway ahead in penetrating its home market. As the Latin American economy matures, it should be easier for MercadoLibre to reach many of these people.
Estimates from EBanx point to Latin America as being among the world's fastest-growing regions for e-commerce. E-commerce in Latin America could be worth more than $200 billion, and many of the countries in the region grew e-commerce sales 40% to 60% year over year in 2021.
But the critical ingredient that could tie all of this together is MercadoLibre's fintech segment. It's the company's fastest-growing business; in 2021, unique active fintech users grew 23% year over year to 34.5 million, digital wallets grew 36% to 19 million, and investment accounts grew 49% to 22 million. People touch their money frequently, often daily, so MercadoLibre's fintech business could be vital to staying involved in its customers' lives.
3. Bargain valuation
Investors have mostly run away from growth stocks in recent months, catching MercadoLibre in the carnage. The stock ran as high as almost $2,000 per share before taking a roughly 50% haircut. The stock has rebounded, trading at just under $1,200 today, but remains well below its highs.
To some degree, the sell-off has been justifiable. Market euphoria that seemed to peak in November 2021 pushed MercadoLibre well above its "normal" valuation, surpassing a price-to-sales ratio of 24 when the stock spent much of the decade trading below a P/S of 12. In hindsight, there was arguably a bubble in growth stocks, and the market made an unpleasant but healthy correction.
But the pendulum can swing too far in both directions, and it looks like the hate on MercadoLibre may be a bit overdone. The stock has retreated to a P/S ratio of just over 8, near its lowest valuation over the past decade.
MELI PS Ratio data by YCharts
However, the company is arguably doing better than ever before. Growth has accelerated in recent years, and the company's fintech business is rapidly picking up users.
Investors are poised to see investment returns that reflect MercadoLibre's growth moving forward at the very least and could even see an eventual rise in the stock's valuation. Nothing is guaranteed, and MercadoLibre must continue to execute, but it's hard not to like the risk versus reward opportunity available today.
