MercadoLibre (MELI -1.79%) was one of the hottest stocks during the worst of the pandemic, hitting an all-time high of $1,984 on Jan. 20, 2021. Yet, shares of the Latin American online marketplace now trade around $739, down 63% from those highs. Can MercadoLibre rebound amid such poor macro-economic conditions?
Here are two reasons you can look for a big-time bounce back in MercadoLibre's stock now.
Image source: Getty Images.
1. MercadoLibre continues to deliver consistent growth
MercadoLibre faces significant headwinds as the company's two largest markets, Argentina and Brazil, are now dealing with the aftermath of the pandemic, which left each country with high inflation, high interest rates, and uncertainty surrounding consumer spending.
However, despite terrible conditions in MercadoLibre's primary markets, it has performed exceptionally well compared to other e-commerce players around the globe. Chief Financial Officer Pedro Arnt said that compared to other e-commerce marketplaces, which have given back a significant portion of what they gained during the pandemic, MercadoLibre engagement remained sticky and even gained some from where it was last year.
Revenue has also been growing faster over the last year on a trailing 12-month (TTM) basis than almost all the major e-commerce marketplaces worldwide. The only company growing faster is Sea Limited (SE 2.03%).
MELI revenue (TTM). Data by YCharts.
But unlike Sea, MercadoLibre's growth falls to the bottom line. Its operating margin for the first quarter reached 6.2%, compared to Sea's negative 17.2% in the same quarter. And MercadoLibre produced net income of $65 million versus Sea's net loss of $580 million.
MELI net income (quarterly). Data by YCharts.
Notwithstanding the poor economic conditions in South America, MercadoLibre is still in growth mode, with plans to hire 14,000 new employees in 2022. Consequently, the company should bounce back with a vengeance whenever Latin American economies return to growth mode.
2. An integrated ecosystem is a competitive advantage
One significant pain point for merchants is assembling the array of tools necessary to run an online business effectively. Some merchants choose to spend considerable resources attempting to patch together completely different systems. However, one big problem merchants face when doing that is finding solutions that all work together efficiently.
In contrast, a merchant can save time and money by building an online store using MercadoLibre's services -- a single platform containing all the necessary tools for operating a store. And all of its tools are designed to seamlessly work together, a competitive advantage over virtually all of the company's competitors that only offer one or two services on a stand-alone basis.
MercadoLibre's ecosystem comprises six integrated e-commerce services: the MercadoLibre e-commerce marketplace, the Mercado Pago fintech solution, the Mercado Envios logistics service, Mercado Ads, MercadoLibre classifieds, and the Mercado Shops online storefronts.
Management recently hinted on the first-quarter earnings call that it could soon begin aggressively offering integrated bundles of its six services to merchants, which could make already-sticky services even more attractive. Additionally, bundling products can reduce marketing costs for MercadoLibre while increasing product profitability in the long term.
The one possible fly in the ointment
Amazon (AMZN -1.64%) could present a significant long-term threat to MercadoLibre's business. As of 2020, Brazil represented Amazon's fastest growth in Prime subscriptions worldwide. And in the same year, Amazon increased the cities available for two-day deliveries in Brazil to 500, effectively covering the whole country.
MercadoLibre's stock recently dropped 9% in a knee-jerk reaction to the news that Amazon plans to expand into Chile and Colombia by early 2023. So investors need to be aware of Amazon's continued presence.
However, some people think that it could be Amazon that is threatened long term by MercadoLibre. First, MercadoLibre is on its home court in one of the more challenging areas in the world for an American company to operate a business. For example, Walmart (WMT 1.32%) once tried to plant its flag in Brazil and eventually made an exit in 2018 due to poor results.
Second, MercadoLibre was founded in 1999, giving it a 13-year head start on Amazon, which first entered Brazil in 2012. So Amazon faces a tough battle against MercadoLibre.
The bottom line
MercadoLibre presently sells at just under five times trailing 12-month sales, which is cheap compared to its high of nearly 25 over the past decade. Investors willing to patiently wait out Latin America's poor market environment should consider investing in one of the best e-commerce marketplaces in the world at today's bargain price.
