MercadoLibre's (MELI 0.10%) stock rose 5% during after-hours trading on Thursday, Nov. 3, following the release of its third-quarter earnings report. The Latin American e-commerce leader's revenue increased 45% year over year (61% in constant currency terms) to $2.69 billion, which narrowly missed analysts' expectations by $10 million. Its net income grew 36% to $129 million, or $2.56 per share, which easily cleared the consensus forecast by $0.24.

MercadoLibre's growth rates were impressive, but should investors buy its stock in this challenging market for high-growth e-commerce stocks? Let's review its growth trajectory, margins, and valuations to decide.

A Brazilian flag on a parcel in a tiny shopping cart on a laptop.

Image source: Getty Images.

A soft post-pandemic landing

MercadoLibre's growth rates have cooled off from its pandemic-driven acceleration in 2020 and the first half of 2021, but it's experienced a much softer post-pandemic landing than many of its e-commerce peers.

MercadoLibre's gross merchandise volume (GMV) rose 32% year over year to $8.6 billion in the third quarter in constant currency terms, which actually represented an acceleration from the second quarter. Its three largest markets -- Brazil, Argentina, and Mexico -- grew their GMV by 20%, 87%, and 23% year over year, respectively, in constant currency terms.

Its total payment volume (TPV) also increased 76% year over year to $32.2 billion in constant currency terms, driven by the growth of its digital payments service Mercado Pago for both payments within its own marketplace and for off-platform transactions. Its total number of unique active fintech users increased by 10 million over the past 12 months, and surpassed 40 million by the end of the third quarter. Its total unique active users (across both its e-commerce and fintech ecosystems) increased 11% year over year to 88 million. 

MercadoLibre is already the top e-commerce company in Latin America, but its quarterly active user base still only accounts for about 13% of the region's population. Therefore, it could still have plenty of room to expand as average household incomes and e-commerce penetration rates climb across Latin America.

Metric

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

GMV Growth (YOY)

30%

32%

32%

26%

32%

TPV Growth (YOY)

59%

73%

81%

84%

76%

Unique Active Users Growth (YOY)

3%

11%

16%

11%

11%

Revenue Growth (YOY)

73%

74%

67%

57%

61%

Data source: MercadoLibre. Constant currency terms. YOY = Year over year.

MercadoLibre's growth trajectory over the past year suggests it won't run out of steam anytime soon. Volatile exchange rates and a strong dollar will inevitably generate near-term headwinds for MercadoLibre, but analysts still expect its reported revenue to rise 49% this year and another 25% in 2023.

Expanding margins and rising profits

MercadoLibre's gross and operating margins expanded both sequentially and year over year in the third quarter:

Metric

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Gross Margin

43%

40%

48%

49%

50%

Operating Margin

9%

1%

6%

10%

11%

Data source: MercadoLibre. Constant currency terms.

During the conference call, CFO Pedro Arnt mainly attributed that expansion to the "growth of higher-margin businesses," its "disciplined approach to short-term growth investments," and its "focus on leveraging our scale" to reduce its cost of goods sold and operating expenses. The expansion of its first-party logistics network, which squeezed its operating margins in previous years, is also finally paying off by reducing its delivery costs.

As those economies of scale kick in, analysts expect its operating margin to rise 60 basis points to 6.8% this year and climb to 8.5% in 2023. They expect its EPS to more than quadruple this year and grow another 75% in 2023.

The valuations and verdict

We should take those estimates with a grain of salt in light of the record inflation in Argentina and the political unrest in Brazil, but MercadoLibre has withstood plenty of regional crises since its founding in 1999. Based on those expectations, MercadoLibre's stock might initially look pricey at over 100 times forward earnings. But in terms of revenue, which is arguably a better valuation for high-growth tech companies, it looks cheap at just 3 times next year's sales.

Sea Limited (SE -0.19%), the high-growth Southeast Asian e-commerce giant that retreated from several Latin American markets to cut costs earlier this year, trades at just 2 times next year's sales but remains deeply unprofitable. Amazon (AMZN -0.09%), which repeatedly failed to crack the Latin American market, trades at just 40 times forward earnings and less than 2 times next year's sales, but it's growing a lot slower than MercadoLibre.

Therefore, I believe MercadoLibre is still a great buy at these levels. Its stock could remain volatile, but it's still well-positioned to generate big long-term gains as Latin America's e-commerce and fintech markets continue to expand.