In a challenging stock market environment, the second-quarter 2022 results of MercadoLibre (MELI -1.98%), the Latin American e-commerce and fintech giant, gave investors a rare occasion to cheer. Shares jumped over 15% the day after the company reported earnings. Overall, MercadoLibre's shares have surged by over 60% since their lows a couple of months ago.
Seeing that price spike, many investors may be wondering if they missed a golden buying opportunity, and if it's too late to take a position in MercadoLibre. Should investors wait for MercadoLibre's share price to drop before investing?
Investing guru Peter Lynch has said: "Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." This couldn't be more true for MercadoLibre. No one can predict short-term movements in share prices. Looking at MercadoLibre's performance and the long runway in front of it, staying away from investing in hope of a correction could be a major lost opportunity for long-term investors. Let's see why.
MercadoLibre is expanding its moat
Despite tough comparisons with the year-ago quarter when the pandemic propelled MercadoLibre's revenue by 103%, the company reported an astonishing 57% growth in sales in the recently reported second quarter. MercadoLibre's core e-commerce business continued to shine as the gross merchandise volume (GMV) -- the total value of all transactions on its platform -- reached an all-time high of $8.7 billion, growing 22% year over year. About 41 million unique buyers bought 275 million items in the quarter. The company continues to strengthen its position in its top three key markets of Argentina, Brazil, and Mexico, where the GMV grew 33%, 28%, and 30% respectively.
Online retail has been showing signs of slowdown in the recent quarters as people are eager to get out and shop in person. The rising costs and uncertainty around the economy are also making consumers tighten their purse strings. So what makes MercadoLibre's e-commerce business so special that it continues to thrive in today's difficult conditions?
Image source: Getty Images.
First, the company fulfills a very broad range of consumer needs with products ranging from groceries and electronics to toys, auto parts, and pretty much anything else imaginable. Second, MercadoLibre has really simplified its website for its customers, and with its deep understanding of consumer preferences, the company is able to offer timely and relevant promotions that are appealing to buyers.
Finally, the company continues to advance its shipping network -- Mercado Envios -- delivering packages faster and also reducing its internal costs of shipping. Key initiatives such as expansion of its aircraft carriers under MELI Air, growth in local pickup and delivery spots with MELI Places, and the crowdsourced approach to last mile delivery under MELI Extra are turning MercadoLibre's shipping operation into a major competitive advantage for the company.
As its website becomes a go-to destination for Latin American consumers, the company's online real estate is also becoming more and more valuable to advertisers. Although still in the early stages, MercadoLibre grew its advertisers in all geographies in the second quarter, and the number of ad clicks increased by 50% year over year.
Seeing that stellar second-quarter performance, it is no surprise that investors flocked to buy shares of the company, pushing its share price dramatically higher the day after the earnings release.
It's not just a payment processor, it's a digital bank
MercadoPago has often been termed a "payment processor." Sure, that's where MercadoPago began its journey, and payment processing continues to be a central component, but it has expanded its scope to offer a much broader range of financial services.
For the second quarter of 2022, total payment volume (TPV) processed by MercadoPago increased by a massive 72%, reaching $30 billion, thanks to the continuing adoption of the company's mobile point-of-sale (MPOS) service by merchants and the growing popularity of QR code payments.
More and more sellers and buyers on MercadoLibre's e-commerce platform, as well as dedicated MercadoPago users, are taking advantage of the credit facilities and personal loans offered by the company. MercadoPago's asset management and savings features are also becoming really popular. Assets under the company's management have grown 30% year over year.
MercadoPago is becoming a one-stop-shop digital financial services hub for Latin American consumers. Collectively, the e-commerce and fintech arms of MercadoLibre make consumers' relationships with the company extremely sticky. And as more people come to the platform, they attract more sellers, further fueling the digital fintech services, and the virtuous cycle continues.
Investors see MercadoLibre's strong position in the Latin American market and have been taking advantage of the pullback in its share price, leading to some resurgence over the past couple of months.
A measured approach for investors
Retail e-commerce sales in Latin America are expected to grow from an estimated $104 billion in 2022 to $160 billion in 2025. The fintech opportunity on top of that creates a long runway for the company. MercadoLibre, with its strong competitive advantages, is in an excellent position to capture that lucrative market opportunity.
The stock market has been extremely volatile over the past 12 months or so, and predicting what happens next is impossible. A smart strategy for investors might be to deploy their capital in high-quality businesses like MercadoLibre incrementally, rather than deploying all at once.
Although there are no guarantees, even if MercadoLibre's shares have jumped quite a bit in the past two months, they're still trading 50% lower than their highs in September 2021. On a price-to-sales basis, MercadoLibre's shares are also trading close to their lowest valuation.
MELI PS Ratio data by YCharts
It's possible that waiting on a correction could mean investors may never invest in MercadoLibre -- because that correction may just never happen. The loss of potential upside over the long term may be many times larger than a relatively small discount that may come with a correction. For smart, long-term, and business-focused investors, the best strategy could be to take a small position in MercadoLibre now.
