Mercadolibre's (MELI 1.38%) stock had a great run over the last five years after delivering around a 220% return to shareholders (as of this writing). But that's after it declined more than 60% from its peak of $1,970 per share!
Investors who missed the boat might be eager to buy the stock during this price correction. Before they do so, here are two crucial aspects of the company that they should know.
1. A quick overview of Mercadolibre's economic machine
Mercadolibre is the leading e-commerce and fintech platform in Latin America. It serves 140 million users in 18 countries, enabling $28.4 billion in gross merchandise value (GMV) transactions and $77.4 billion in total payment value (TPV) in 2021.
Its reach might be extensive, but Mercadolibre did not get here overnight. The founders wrote their business plan at Stanford business school in 1999, then launched their e-commerce business early on in countries like Argentina and Brazil. Over the years, the tech company added new markets and services (such as fintech, logistics, and others).
Commerce and fintech accounted for 66% and 34% of Mercadolibre's 2021 revenue. The former constitutes mainly revenue from e-commerce transaction fees, first-party sales, shipping fees, and advertising. The latter includes commissions from payment transactions, fees for services like installment payments and cash withdrawals, and interest on loans.
Despite operating in 18 countries, the tech company generates the bulk of its revenue from three countries: Brazil, Argentina, and Mexico. These three countries accounted for 55%, 22%, and 17%, respectively, of the company's 2021 revenue. The rest are from the remaining markets.
2. What investors can expect from Mercadolibre in the coming years
Mercadolibre's rise from a young start-up into a tech behemoth has been remarkable. In the last five years alone, revenue rose more than sevenfold from $844 million in 2016 to $6,149 million in 2021.
But after achieving so much over the last two decades, can the e-commerce company keep growing in the coming years? The short answer is yes, albeit probably not at such hypergrowth rates.
According to Worldometers.info, there are around 666 million people in Latin America. Mercadolibre's 140 million active users represent around one-fifth of this addressable market. Besides, these countries generally have a much lower GDP per capita. For example, Brazil's GDP per capita in 2020 was around $6,800 compared to developed countries like the U.S., which had around $64,000 in GDP per capita in 2020. An increase in e-commerce market penetration alongside growth in the region's GDP per capita will certainly keep Mercadolibre busy for a long time.
On top of these external tailwinds, Mercadolibre has been developing new products and services over the years to expand its addressable market size. Take fintech, for example. In the early days, Mercado Pago (the digital payment company) facilitated e-commerce transactions by enabling seamless payments between merchants and buyers on Mercadolibre's platforms. Over time, the subsidiary expanded its coverage to include payment transactions beyond Mercadolibre's ecosystem and added additional products like credit and investment. Credit, in particular, has demonstrated enormous progress over recent years. The credit portfolio quadrupled from $576 million to $2,415 million in the last four quarters alone.
These new services undoubtedly lead to other risks. For example, the credit business has exposure to credit losses and interest rate risks -- yet they open up new opportunities for Mercadolibre to grow its ecosystem. And if history is any guide, the tech company will likely continue experimenting with new products and business models.
In short, the growth opportunities remain ample.
Final thoughts on buying Mercadolibre's stock
So far, Mercadolibre's business looks promising, thanks to its solid track record and firm prospects.
Yet, new investors should not rush into buying up the stocks. It will probably serve them better over the long run to buy Mercadolibre's stock over time. They can invest around 10 to 20% of their allocated funds and add to that position over time.
Doing so will give them more time to learn about the business and the potential pitfalls and risks that could surface over time. In a volatile market (like the one we are experiencing now), it is reasonable to put safety ahead of immediate gain.