Over the past year, several closely watched tech companies -- including Amazon, Alphabet, and Tesla -- have split their stocks. Those splits didn't make the stocks fundamentally cheaper, but they still generated a lot of buzz among retail investors, some of whom weren't willing to pay hundreds or thousands of dollars for a single share.
However, one tech giant that has never split its high-priced stock is MercadoLibre (MELI -1.98%), the largest e-commerce company in Latin America. MercadoLibre went public at $18 in 2007 and soared to a peak closing price of $1,984.34 in January 2021. Now, though, it trades in the $900s. Could a stock split attract new investors to the company?
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MercadoLibre's main challenges
Before we discuss a potential stock split, we should review MercadoLibre's strengths and weaknesses as a business. Like many other e-commerce companies, it experienced accelerating growth throughout the pandemic as many brick-and-mortar stores were temporarily shuttered. However, that growth spurt also set it up for tough year-over-year comparisons once social distancing efforts were relaxed and people transitioned back toward their pre-pandemic shopping behaviors.
To make matters worse, inflation has had a severe impact across its three largest markets -- Brazil, Argentina, and Mexico -- and the strengthening U.S. dollar widened the gap between its constant-currency and reported growth rates over the past year.
But despite all those challenges, MercadoLibre continued to grow faster than most of its e-commerce peers. In 2021, its revenue rose by 78% to $7.07 billion, its operating margin expanded 300 basis points to 6.2%, and it generated a net profit of $83 million -- compared to a net loss of $700,000 in 2020. Its number of unique active users grew 5% to 139.5 million.
In the first nine months of 2022, revenue grew another 53% year over year to $7.54 billion, its operating margin expanded by 70 basis points to 9.1%, and its net income surged by 146% to $317 million. Its number of unique active users rose by 6% year over year to 127 million. For the full year, analysts expect its revenue to grow 49%, its operating margin to land at 7.8%, and its net income to rise nearly fivefold.
Management attributed that robust growth to the strength of its logistics network and digital payments ecosystem, which gave the company an edge over foreign competitors like Amazon, Alibaba's (BABA 0.09%) AliExpress, Sea's Shopee, as well as its smaller regional rivals. The fact that its operating margins are expanding also indicates that economies of scale are kicking in.
By comparison, analysts expect Amazon's revenue to grow by 9% this year and foresee it generating a net loss on the bottom line. Alibaba, which is struggling with particularly tough macro and regulatory headwinds in China, is expected to generate just 3% revenue growth and nearly flat adjusted earnings in 2022.
Could a stock split breathe fresh life into its shares?
MercadoLibre trades at 70 times next year's forecast earnings and about 4 times next year's expected sales. Those are pricier valuations than Amazon or Alibaba command, but its stronger growth rates arguably justify them.
Splitting MercadoLibre's stock won't make it any cheaper in a valuation sense. If it undertook a 10-for-1 split, for example, its trading price would drop from around $940 to around $94, but the new shares would simply confer an ownership stake in the company that was one-tenth as large as the pre-split shares did. That might make them more appealing to smaller investors, who would be able to buy more shares or invest in MercadoLibre without buying fractional shares.
The real difference, though, would be felt in the options market, where a single options contract is tethered to 100 shares. At its current price, a single options contract for MercadoLibre is linked to about $94,000 worth of shares. So executing a 10-for-1 split would reduce that minimum threshold to $9,400. That would lower the barrier to entry for would-be options traders, which could generate more liquidity for MercadoLibre's shares. That heightened activity could also attract more active traders.
It doesn't matter if MercadoLibre splits its stock or not
As long-term investors, we shouldn't care if MercadoLibre's stock looks cheaper or gets more actively traded. Instead, we should remember that the underlying company is growing like a weed, that it remains the clear leader in the underpenetrated Latin American e-commerce market, and that its margins and profits are soaring as it finally reaps the benefits of its earlier investments.
MercadoLibre's stock isn't a screaming bargain, and a stock split won't change its underlying valuations. However, I own shares of MercadoLibre and believe it still has plenty of upside potential -- even if it doesn't jump on the stock-split bandwagon anytime soon.
