Stock splits used to be much more common, but the rise of fractional shares in brokerage accounts has nullified that practice, especially in the U.S. However, some companies have split their stocks recently (like Tesla, Alphabet, and Amazon) to make stock options a more accessible form of compensation to employees. All three of these companies' stocks were trading above $1,000 when this split occurred, making this a standard threshold for determining if a company should split its stock.
One stock that may be close to splitting is MercadoLibre (MELI -1.66%), which currently sits at around $1,000 per share. However, the stock is also more than 50% below its all-time high after almost eclipsing the $2,000 mark in January 2021. While MercadoLibre may be reaching a point where it could split, the business is also executing at a high level, despite what its stock chart looks like.
Stock splits are an indication of a growing company
Why do investors look for stock splits? It's pretty simple: The only reason to split your stock is if the price has gone too high. How does a stock price increase? The business grows with solid execution and has further growth on the horizon.
MercadoLibre's business certainly fits the bill for that criteria.
It is Latin America's top e-commerce provider and has its hands in multiple steps in the process. First, a consumer buys an item listed on MercadoLibre's commerce platform; then, they might pay with Mercado Pago, its digital wallet. On that digital wallet may be a credit card issued from the Mercado Credito division. Finally, the package gets delivered to the buyer using Mercado Envios, the shipping logistics segment.
An investment in MercadoLibre is an investment in the growth of Latin America. This is inherently risky, as you're dealing with 18 countries with more volatile governments and currencies than the U.S. However, the opportunity is immense because of the 650 million people in this region.
This region is also ripe for growth, which MercadoLibre's financials indicate.
Growth across the board
MercadoLibre's business is a tale of two segments: commerce and fintech. While commerce is larger, fintech is growing at a faster rate.
| Segment | Q3 Revenue | YOY Growth Rate |
|---|---|---|
| Commerce | $1.465 billion | 33% |
| Fintech | $1.225 billion | 115% |
Data source: MercadoLibre. YOY: year-over-year.
Combined, MercadoLibre grew its revenue at a 61% clip to $2.69 billion in Q3. That's an astounding rate, but MercadoLibre's fintech growth will slow in the coming quarters. Management has expressed that it is slowing the growth of its consumer and merchant credit products. It's doing this to mitigate risk, as it is seeing a rise in its past-due debt. However, demand for lending products remains strong, and growth can quickly return to this segment when management feels it is prudent to do so.
Still, MercadoLibre's core fintech business continues to see strong total payment volume growth, rising a currency-neutral 76% in Q3. The platform also added 10 million unique fintech users, up from 31.6 million last year.
Moving to commerce, MercadoLibre only sold 9% more items in Q3, but its gross merchandise volume rose 32% year over year. This indicates that the price of goods is rising or consumers are purchasing more expensive items. Either way, a higher volume allows MercadoLibre to scrape more from each transaction, causing its commerce revenue to rise.
MercadoLibre is also profitable, although it continues to reinvest in itself heavily. With a 4.8% profit margin, the bottom line has plenty of room to expand. Because of this, investors should value MercadoLibre using a price-to-sales or price-to-free-cash-flow ratio.
MELI Price to Free Cash Flow data by YCharts
At 31 times free cash flow, the stock isn't cheap. But it's not alone in this valuation. Home Depot has consistently traded around 30 times cash flow over the past few years. As a point in MercadoLibre's favor, it's also growing much faster than Home Depot, indicating the stock could be undervalued.
When you look at MercadoLibre's stock from a price-to-sales standpoint, it's pretty clear it is undervalued.
MELI PS Ratio data by YCharts
At five times sales, MercadoLibre is valued at its lowest point since the bottom of the Great Recession. However, with the company steadily growing (and projected to grow 22.5% next year, according to the average analyst), the outlook doesn't seem as dire as it did in March 2009.
MercadoLibre's stock is undervalued, and the business is growing. This makes the stock an excellent candidate to explode higher, even to the point of needing a stock split. As a result, I'm a strong buyer of MercadoLibre's stock, as the long-term outlook for this company is strong.
