Of all the growth stocks I own, few are as much of a screaming buy as MercadoLibre (MELI 2.55%). The stock is down more than 50% from its all-time high, but its valuation is also near an all-time low.
Despite what picture you might get from looking at the stock graph, the business is doing quite well. When you can buy a growth stock for cheap when it's disconnected from the business, you can often make a huge return. Here's why I think MercadoLibre's stock could power higher again.
MercadoLibre shouldn't be treated like a U.S. stock
MercadoLibre is the king of e-commerce in Latin America. With its commerce platform, shipping logistics, consumer credit division, and digital wallet, MercadoLibre covers nearly every portion of an e-commerce transaction.
One element that could be affecting investors' view of the company is that the economic conditions in Latin America don't directly correlate with the U.S. This disconnect can cut both ways, but it's still something investors must keep in mind. For example, the consumer price index (CPI), often used to track inflation, was up 8.2% in September for the U.S., 8.7% in Mexico, and 7.2% in Brazil. But in Argentina, where MercadoLibre is headquartered, the CPI for September was 83%.
The critical point here is to understand MercadoLibre's business will be more tumultuous than a U.S. retailer, as each country has a different economic and political environment. However, this hasn't stopped MercadoLibre from delivering stellar results.
Management is slowing its impressive growth on purpose
MercadoLibre's revenue rose 61% in the third quarter to $2.69 billion, driven by its fintech wing's 115% growth to $1.2 billion. Although fintech trails the commerce division by about $200 million in quarterly revenue, it's on track to take over the crown of the largest division within MercadoLibre.
That's not to say commerce is underperforming; revenue still grew 33% year over year (YOY) to $1.46 billion. However, the increase came primarily from greater gross merchandise volume (up 32% YOY), as items sold only rose 9% YOY.
Where MercadoLibre is really starting to shine is its consumer credit division. MercadoLibre's portfolio rose 146% YOY to $2.8 billion, but its quarter-over-quarter growth was only 3% as MercadoLibre seems to have reached its appetite for the risk it's willing to take on. MercadoLibre purposefully controlling its credit division growth demonstrates management's poise, as it could continue to expand the division to drive high growth but with increased risk.
This new division has helped MeracdoLibre's bottom line, as the company has been consistently profitable over the past few quarters. In Q3, MercadoLibre's profit margin was 4.8%, down from Q3 2021's 5.1%, which was boosted by pandemic e-commerce demand. One thing to note: This isn't MercadoLibre's target profit margin. It is still investing heavily in its commerce ecosystem buildout, so more gains are possible if MercadoLibre continues its success and matures.
Because of its marginal profitability, MercadoLibre should be valued on a price-to-sales basis, giving investors a more accurate picture. At 5.3 times sales, MercadoLibre has only been valued cheaper twice in its time as a public company: first in March 2009 (the bottom of the Great Recession) and second in July 2022.
Typically, when companies reach all-time-low valuations, it indicates the business is in trouble or is maturing and has declining sales. MercadoLibre is neither of those.
The massive growth opportunities ahead throughout all MercadoLibre's divisions will continue to drive expansion. Credit will always be in demand, and when MercadoLibre decides to expand its portfolio again, it will see monster growth. E-commerce is also still doing well, but fintech's impressive expansion overshadows the segment, at least right now.
It doesn't make sense for MercadoLibre to be down this significantly from its all-time high. I think investors can confidently buy the stock if their holding period is greater than three to five years. That way, investors can ride out any stock market sentiment swings and let MercadoLibre's business results do the talking. The stock is primed for a strong recovery, but when that will happen is anyone's guess.
Thus, investors should use the current overall market weakness to purchase shares of MercadoLibre, as its recovery could be swift when it occurs.
