Many investors are focused on the stresses in the U.S. market today -- a combination of rising interest rates and an increasingly challenged consumer. Yet, the U.S. is not the only place where investors can hunt for good stocks. Many fail to look abroad to see what opportunities there might be.
MercadoLibre (MELI 1.96%) is the largest e-commerce player in Latin America, serving 18 countries in the region. Unfortunately, its stock has been obliterated alongside other e-commerce stocks even as the business has grown at a pace few domestic companies can claim.
As a result, investors should take a hard look at MercadoLibre as this could be a once-in-a-decade buying opportunity.
Its fintech division has been on fire
While MercadoLibre is known for its e-commerce segment (which includes an online store plus a shipping logistics division), what excites me the most is its fintech business. Mercado Pago's digital wallet is a juggernaut and continues to see massive adoption by consumers.
| Metric | Q3 2021 | Q3 2022 | Change |
|---|---|---|---|
| Wallet payers | 16.8 million | 22.4 million | 33% |
| Unique fintech users | 31.6 million | 41.6 million | 32% |
Data source: MercadoLibre.
While its user growth is impressive (this was the most users the company added over the past two years), total payment volume (TPV) is even better. On-marketplace volume (how much money was spent on a MercadoLibre platform) was up 39% year over year, and 99% of all transactions utilized Mercado Pago. Off-marketplace volume (peer-to-peer or peer-to-merchant type transactions) was up 122% year over year.
Another bright light in its fintech division is Mercado Credito, its consumer credit division. The growth here has been astounding, with its portfolio rising nearly 150% in volume since last year. This increase helped MercadoLibre increase its fintech take rate (how much money it scrapes from each transaction) by 0.66% to reach 3.81%. While the demand for this product is strong, management said it is choosing to slow growth and giving "prioritization of risk management and margin over growth."
That level of maturity in leadership demonstrates impressive self-control as management is not willing to potentially ruin a great company just for growth. I think many U.S. companies could learn from this outstanding leadership team.
Others could take a few notes from MercadoLibre
While fintech may be all the rage, the e-commerce division isn't doing badly either. Just like every other e-commerce business, MercadoLibre has had to deal with tough comparisons because of the spike it saw during 2020 and 2021.
Still, gross merchandise volume (GMV) rose 32% year over year, indicating the value of goods being sold through its platform is rising. Additionally, MercadoLibre is getting a 17% cut from each sale, up 14.3% year over year. Overall, the commerce division rose 33% year over year to $1.5 billion in revenue. Although this isn't the blistering 115% growth to $1.2 billion the fintech wing experienced, it's still respectable.
MercadoLibre is also getting more efficient. Its operating margin rose from 8.6% last year to 11% this year although its net income margin fell from 5.1% to 4.8% due to tax and currency depreciation in Argentina (where MercadoLibre is based).
So, MercadoLibre is a rapidly growing company whose expenses aren't rising out of control. You'd think the stock would be somewhat flat for the year, but you'd be wrong. The shares are down over 36%, and its price-to-sales valuation has reached levels not seen for over a decade.
MELI PS Ratio data by YCharts
As you can see from the graph, MercadoLibre reached an absurd valuation level in 2021 and was deservedly sold off. Now, it has crashed through its average range, trading at levels last seen at the depths of the Great Recession in 2009.
Another head-scratching takeaway is that fintech businesses are more efficient and therefore command a higher premium. However, as MercadoLibre's growth has become an even split between commerce and fintech, its valuation has cratered.
Wall Street also agrees MercadoLibre is undervalued. Analysts' average price target for the stock is $1,300, implying a nearly 50% upside. There's no such thing as free money in the stock market, but MercadoLibre's stock is about the closest thing that there is to meet that description.
I think MercadoLibre is an excellent buy here, and investors shouldn't wait for others to notice this stock.
