One only has to visit a grocery store or gas station to see how inflation has eroded the buying power of consumers. This has extended into stocks as the S&P 500 flirts with bear market territory. Moreover, many growth tech stocks have lost more than three-fourths of their value.
However, MercadoLibre (MELI 1.24%) has learned how to prosper in Latin America despite high inflation. More importantly for investors, it serves as an example of how U.S. investors can flourish regardless of whether inflation in the U.S. continues to rise.
Image source: Getty Images.
MercadoLibre and inflation
MercadoLibre is the leading e-commerce platform in Latin America. It's been in business since 1999, and its stock debuted in 2007. Despite that region's reputation as a difficult place to do business, the stock has prospered, moving higher by more than 2,400% since its IPO.
Investors should also note that MercadoLibre is the one e-commerce stock that's still growing in this environment. In the first quarter of 2022, revenue increased by 63% to $2.2 billion. And these figures are in U.S. dollars, not local currencies.
While the U.S.'s current 8.3% inflation rate is higher than in the past, it is lower than inflation in MercadoLibre's largest markets. About $1.25 billion, or 56%, of its revenue came from Brazil, a country with a 12% inflation rate. It also earned $518 million in revenue, around 23% of its total, from its home country of Argentina. Argentina remains a significant revenue driver as measured in U.S. dollars, despite years of runaway inflation in that country.
Data source: International Monetary Fund.
What MercadoLibre does
Fortunately, consumers still need goods in an inflationary environment, and rising prices have not stopped a secular growth trend in e-commerce. This helps support its primary businesses as an e-commerce facilitator. Sellers post their offerings to its marketplace, similar to eBay. MercadoLibre earns revenue by facilitating the transaction. Increasingly, it has built logistics and advertising capabilities that can support sellers and serve as additional sources of revenue.
However, its biggest marketplace coup may have come from serving Latin America's heavily unbanked population. Latin America is a largely cash-based society, complicating e-commerce in a region that depends on electronic payments to sell.
MercadoLibre developed a workaround by creating Mercado Pago. Mercado Pago offers fintech services such as prepaid cards, money transfer services, and other services that enable electronic payments. Such offerings also serve businesses and customers outside MercadoLibre, making the company more of a fintech company in many respects.
Additionally, many of these business segments earn money by percentage transaction fees. Thus, the revenue of such services rises with inflation, so much so that stockholders should also take notice of its massive fintech growth. In the latest quarter, online payments rose 54% year over year, and its digital accounts transacted $7.9 billion, a 178% increase over the last 12 months.
MercadoLibre and inflation
Between its e-commerce and fintech offerings, MercadoLibre can serve as an inflation hedge. Furthermore, understanding the company's business offers lessons on how to drive positive returns in an inflationary environment.
Despite significant inflation in its two biggest markets, the internet and direct marketing retail stock has successfully driven higher e-commerce sales levels when measured in U.S. dollars. Moreover, the revenue model of its fintech business serves as an inflation hedge by tying revenue to transaction volumes. Such a performance not only bolsters the investment case for MercadoLibre stock but also shows that companies can achieve success amid rising prices.
