The stock split mania that took over the stock market this summer has subsided, but that doesn't mean there aren't new stock splits on the horizon.
Whenever a single stock price hits the four-digit mark, investors begin to wonder if a split is coming. A high price may be a barrier to entry for investors whose brokerages don't offer fractional shares, and it may act as a deterrent nonetheless. Even though breaking down shares into smaller portions doesn't change anything fundamental about the company or its financials, it does seem to attract investors and often gives the stock a quick bump.
MercadoLibre (MELI -1.79%) stock was trading at more than $1,900 just over a year ago, but it's now down 55% since that high. Could a stock split jump-start this stock?
Latin American e-commerce and digital payments
U.S. investors don't have a lot of first-hand experience with MecadoLibre because it operates in Latin America. It's headquartered in Argentina and has businesses in 18 Latin American countries. Although the company sees increasing competition in some of its locations, it has a first-mover's edge and is hard to compete with based on its continued progress.
After monster growth through many quarters of the pandemic, sales keep climbing, although at a slower pace. In the 2022 second quarter, revenue increased 57% (currency neutral) over last year on top of 103% in 2021. Gross merchandise volume (GMV) increased 26% in its more mature e-commerce business.
The higher growth is coming from its newer and smaller digital payments business. Total payment volume (TPV) increased 84% over last year from both merchants and its individual payment accounts business, Mercado Pago. Payment volume from Mercado Pago increased 167% over last year to nearly $9.4 billion. MercadoLibre is fine-tuning many of its fintech products and adding features and services to make it a more compelling and easy-to-use service.
The company is expanding in many areas, and it has a huge addressable market. One of the areas that looks very interesting right now is advertising, where management says it has only scratched the surface.
With GMV growth slowing down, second-quarter revenue growth in the commerce business came mostly from expanding the third-party network and advertising. It's also developing an advertising plan for the fintech side.
Why is the price down?
With revenue growth still strong, many new opportunities, and increasing net income, from $68 million last year to $123 million this year in the second quarter, why is the stock price down?
There could be several reasons why MercadoLibre has lost some investor confidence.
One, despite sales increases, the company's growth rate decelerated from triple digits to double digits. If the company can't keep up its growth rates, investors won't give it the same premium on its stock price.
Beyond that, high-growth tech stocks have lost favor in the current market. Global conditions have been harsh to these companies, and investors moved funds into more secure stocks. Even though MercadoLibre is profitable and growing, which sets it apart from some of the more speculative tech stocks, it's still part of the broader category.
Finally, with a large payments segment, MercadoLibre is subject to many of the issues plaguing financial companies in a volatile economy. For example, its credit business had $2.7 billion in loans at the end of the second quarter, a 230% increase year over year. But the company is slowing approvals for loans and credit cards as it adjusts scoring models amid interest rate increases and inflation, which can lead to a higher likelihood of defaults.
Why split now?
Management hasn't broached the topic of a stock split, and it hasn't yet split its stock. It didn't split last year when the price was heading toward $2,000, and now it's below $1,000.
There was a wave of stock splits recently with some of largest stocks by market cap splitting their stocks, including Amazon's 20-for-1 split. Amazon's stock price initially increased and then came down, but it's still above the pre-split price by around 8%.
MercadoLibre stock recently was trading above $800 per share, which is still a significant price tag for one share. Investors should keep their eye on the stock, but less for the short-term boost potential and more for the long-term potential, which I think is huge.
