MercadoLibre (MELI 1.22%), the dominant Latin American e-commerce and payments company, has defied significant economic headwinds all year. Unlike many of its global peers, the company has produced outstanding revenue, solid margin expansion, and strong free-cash-flow growth throughout 2022.

As a result, when the stock recently released its earnings report on Nov. 3, investors were impressed and bid it up 8%. However, economic experts expect the economies in its largest markets -- Brazil, Argentina, and Mexico -- to perform worse in 2023, so you might ask, "Where does the stock go from here"?

Here's why you should put this Latin American steamroller on your buy list today.

Its e-commerce ecosystem has substantial competitive advantages

MercadoLibre created a first-mover advantage in Latin America by being the first e-commerce company in the region to successfully copy Amazon's strategy of constantly improving the overall customer experience to produce long-term growth. Some of the factors that management thinks enable a superior customer experience are the following:

  • Broad product selection
  • Strong price competitiveness
  • Fast and inexpensive logistics service
  • Excellent customer service
  • Technology

Since the pandemic, MercadoLibre increased investment in all of the above areas. And there's evidence that these investments are already paying off.

For example, even as physical stores reopened across the region in the third quarter of 2022, the company's e-commerce gross merchandise value (GMV) growth accelerated to 32% -- an excellent sign. GMV is the total merchandise sold on the platform in the quarter, and investors use this metric to determine the health of an e-commerce business.

Suppose providing a superior customer experience was the company's only competitive advantage. In that case, sizable global e-commerce platforms like Amazon or Sea Limited could enter the region and, over time, provide a similar customer experience, stunting MercadoLibre's growth or wiping out its margins.

However, the company's most significant advantage is that it had more than a decade before Amazon and Sea Limited showed up to build a vast web of buyers and sellers on its platform. Consequently, MercadoLibre created a huge network effect before significant competition arrived, where the platform's value increased each time a new buyer or seller joined.

In addition, the number of unique buyers continues rising. Third-quarter numbers rose approximately 10% over the previous-year's period. This growth in buyers attracts more sellers to the platform, and the effect snowballs, making it extremely difficult for competitors to catch MercadoLibre.

According to Webretailer.com, the company is the leading online marketplace in South America, logging 667.7 million visits per month, compared to No. 2, Amazon, at 169 million per month. Additionally, Sea Limited lags significantly, producing only 40.7 million Latin American visits a month -- a partial reason Sea shut down recently established operations in Argentina and pulled back in Chile, Colombia, and Mexico.

It has a vast repository of first-party data for advertising

With the eventual demise of third-party cookies by 2024 and Apple already making privacy changes in iOS, first-party consumer data has become exceedingly valuable for advertisers. And guess who has a treasure trove of first-party data that marketers are eager to use?

If you guessed MercadoLibre, you would be correct.

Several years ago, the company started Mercado Ads, an advertising product that performs similarly to Google Search. For example, when consumers search for an item on its e-commerce platform, it shows the seller's ads to people looking for that product.

Mercado Ads is only a fledgling operation today, making up 1.3% of GMV in the third quarter, up from 0.9% a year ago. However, the good news is that advertisers have shown strong demand for its ad products. As a result, management expects a ton of upside from its advertising solutions in the future.

Suppose MercadoLibre's ad business becomes as successful as Amazon ads have become in the U.S. In that case, ads could become a substantial profitable revenue source several years out.

Should you buy this Latin American marketplace? 

One area of caution: Management slowed the growth of its loan originations in its portfolio, as more loans turned sour in the third quarter, especially in Brazil. Although it doesn't believe its credit $2.8 billion book of business is in trouble, the company is very cautious, as it expects economies in Latin America to worsen.

Considering that Mercadolibre sells at a price-to-sales (P/S) ratio of 4.74, much higher than its global e-commerce peers, the stock price could tank if the economies in its three largest markets of Brazil, Argentina, and Mexico sour significantly.

However, its P/S ratio today trades significantly below its median of 10.58 in the last 10 years -- so the stock is undervalued, based on its history. If you believe that MercadoLibre has proven itself as the best global e-commerce platform, the company would make an excellent choice for your buy list heading into 2023.