For a company demonstrating powerful growth and harnessing incredible opportunity, you don't need to look further than MercadoLibre (MELI -1.79%). The Latin American e-commerce giant posted triple-digit growth over four consecutive quarters at the beginning of the pandemic.
But that's decelerating as macroeconomic trends take a hit on retail and the economy at large, and MercadoLibre profits are suffering as well. The company is also facing strengthening competition from the likes of Amazon and Sea Limited.
MercadoLibre's stock is now down more than 50% this year. Does that make this a great opportunity to buy shares, or should buyers beware?
Demonstrated success with a huge market opportunity
Jennifer Saibil: Many companies that demonstrated dizzying growth during the pandemic are now slowing down, and MercadoLibre is as well. There are several important differences, though. Paramount is that it's still posting exceptional progress. 2022 first-quarter sales rose 67% year over year, which puts it squarely in high-growth mode. Total payment volume (TPV) increased 81%, and gross merchandise volume was up 32%. This is a company with momentum.
And it's easy to see why. MercadoLibre is a force in Latin America, bringing many countries into the digital age. It provides e-commerce services similar to companies like Amazon or eBay, but it also offers digital payment services, not unlike when PayPal was a part of eBay. Its current dominance in the region -- it operates the largest e-commerce and digital business in its region and is a market leader in all 18 countries in which it operates -- combined with its strong venture culture gives it an edge in this vast emerging market.
According to Lazard, the top-five global emerging markets include Mexico and Brazil, which are two out of three of MercadoLibre's biggest markets (the third is its headquarters of Argentina). These five countries started 2020 with the same e-commerce penetration rates that the five highest-developed countries had in 2014. There were 300 million digital buyers in Latin America in the second half of 2021, according to Statista, and that number is expected to grow 20% by 2025. Consider that in 2021, the U.S. saw $85 billion in e-commerce sales, while Latin America had only $64 billion, and yet the Latin American population is almost exactly double the U.S. number.
The company is facing some pressures on its bottom line as it invests in growth, but this is a top growth company that has already posted profits. That should give wary investors some more confidence as well.
Short-term headwinds could become long-term issues
Jamie Louko: The biggest concern for MercadoLibre investors lies in the possibility of a decline in activity over the coming year or two, which could result in long-term damage. Like the United States, Latin America is seeing high inflation rates. In some of MercadoLibre's biggest markets like Brazil and Mexico, inflation has surpassed 5%. Some projections even peg Latin America's inflation rate above 10% in 2023.
Similar to what is happening in the U.S., high inflation on need-to-have goods will likely suppress demand for discretionary goods sold on MercadoLibre's e-commerce platform. Additionally, rising costs could make it more expensive for MercadoLibre's logistics service, Mercado Envios, to deliver goods.
Over the short term, MercadoLibre could see a higher cost of goods and lower revenue, resulting in poor profitability. The company's net income margin is already just 2.3%, but this uncertain short term could send it even lower.
These short-term issues could affect the long-term prospects of MercadoLibre, too. The company had a free cash flow burn of $370 million in the first quarter, which would likely worsen if profitability were to drop.
If MercadoLibre became an unprofitable, cash-burning business, it might struggle to choose between staying operational and capturing market share. If it picked self-preservation, that could allow rivals like Sea Limited to gain share in the e-commerce space. Currently, Sea Limited's Shopee is the second-largest e-commerce business in Brazil in terms of monthly active users, but that could change and leave MercadoLibre falling behind.
With a population of 650 million in Latin America, MercadoLibre has just scratched the surface of its opportunity, considering it had 81 million active users in Q1. However, to fully capture all the region's benefits, it should be the leader. The short-term issues the company is currently facing could hurt those prospects, making MercadoLibre a risky investment today.
Should you buy MercadoLibre stock?
MercadoLibre stock is now 65% off its high last year. At this price, shares are trading at about 4.5 times trailing 12-month sales, which is quite cheap for a company posting high double-digit growth.
The opportunity here looks very compelling. However, the short-term pressure certainly adds in an element of risk. For those who can stomach that risk, MercadoLibre looks like an excellent long-term buy.
