A number of technology's brightest stars have made headlines over the past couple of years by announcing stock splits. Tesla, Amazon, Alphabet, and Shopify jumped on the bandwagon in 2022, following in the footsteps of Apple, The Trade Desk, and Nvidia, which pared their shares in 2021. Investors have been captivated by stock splits, resulting in renewed attention on the companies that do them.
One disruptive company that could soon join the ranks of the stock-split elite is e-commerce pioneer MercadoLibre (MELI -1.98%). Since going public in 2007, the stock has gained a remarkable 3,270% -- and that's even after the recent meltdown in technology stocks. While it doesn't change the robust fundamentals of the company, there's one compelling reason a stock split might make sense in this case.
A primer for this market leader
MercadoLibre is a pioneer in its field and may be one of the most successful companies most investors have never heard of -- so a short primer might be in order.
The e-commerce company was founded in 2007 and was quickly dubbed the "eBay of Latin America," as it promoted the selling of goods between consumers. MercadoLibre quickly evolved, however, and has drawn comparisons to many other successful competitors. The company offers a host of tools that simplify e-commerce and payments. It provides e-commerce, shipping, and fulfillment solutions that rival Amazon, website building tools similar to Shopify, and a payment solution modeled after PayPal. In fact, PayPal was so impressed with MercadoLibre's fintech that it took a $750 million stake in the company.
Its success has helped MercadoLibre become the market-leading e-commerce and fintech company in each of the major markets where it operates -- even outpacing Amazon. However, it was the company's foray into payments that has really taken off. In the second quarter, its total payment volume of $30 billion grew 84% year over year, driven by off-platform transactions (made by other brick-and-mortar and online retailers) of $21.2 billion, up 135%.
Why a stock split might make sense
When a company executes a stock split, it doesn't change anything about the fundamentals of the business, at least not in any real sense. From a mathematical standpoint, the market cap is the same; it's merely the stock price and the number of shares that change -- always in direct correlation to one another. For example, if the company were to enact a 10-for-1 stock split, for each share of MercadoLibre stock held by investors -- currently trading at roughly $920 per share -- post-split, shareholders would own 10 shares worth $92 each (10 x $92 = $920). So the overall value of the investment doesn't change.
On a psychological level, however, the impact is a bit murkier. A stock split tends to communicate to shareholders that management is confident that the business -- and ultimately the stock price -- will continue to grow. This vote of confidence generally tends to build excitement in the investment community, making potential shareholders more bullish on the company's prospects. That is, of course, as long as the business has been growing well and management has a history of executing on a well-developed vision.
In the case of MercadoLibre, however, there's another reason why a stock split might make sense. Shares are currently selling near $1,000 each, though late last year, before the tech rout, the stock was selling in excess of $1,900 per share. In either case, a stock price of that magnitude might put the shares out of reach of the average retail investor, particularly those with less than $1,000 to invest at a time. While some brokerages offer trading of fractional shares, novice investors might still be daunted by the hefty price tag.
Fueling the rise
MercadoLibre stock is currently down 50% from its high reached late last year, the result of the ongoing bear market. But a look at the company's recent results suggest that it won't be long before the stock is scaling new heights. In the second quarter, revenue hit a new quarterly record of $2.6 billion, up 57% year over year in local currencies. This was driven by e-commerce revenue of $1.4 billion, up 26%, while payments revenue of $1.2 billion climbed 107%.
Other metrics attest to the strength of MercadoLibre's business. Gross merchandise volume -- or the value of products sold on its platform -- hit $8.6 billion, up 26% year over year, while its total payment volume of $30 billion surged 84%.
Given the consistent and robust growth of its business -- particularly in the face of macroeconomic headwinds -- investors should seriously consider buying shares of MercadoLibre stock, even if the company isn't the next one to enact a stock split.
