MercadoLibre (MELI 2.00%) delivered an impressive fourth-quarter earnings report on Feb. 23. The Latin American e-commerce and fintech leader's revenue rose 56.5% year over year in constant currency terms to $3.0 billion, topping analysts' expectations by $40 million. It generated a net profit of $165 million, compared to a net loss of $46 million a year earlier, while its earnings of $3.25 per share exceeded the consensus forecast by $0.93 per share.
Those headline numbers were impressive, but MercadoLibre's stock price remains more than 40% below the all-time high of $1,984 it reached just over a year ago. Should investors buy this growth stock as the bulls look the other way?
Image source: Getty Images.
It's still growing like a weed
MercadoLibre, like many other e-commerce companies, experienced accelerating growth during the pandemic. But unlike many of its peers, it didn't suffer a major slowdown in 2022 even as it faced tougher year-over-year comparisons as consumers' felt comfortable returning to their pre-pandemic shopping behaviors.
In the fourth quarter, MercadoLibre's gross merchandise volume (the value of all goods sold on its platform) rose 35% year over year in constant currency terms to $9.6 billion. Total payment volume, which was mainly driven by its Mercado Pago digital payments platform, rose 80% to $36 billion, and its number of unique active users rose 18% to 97 million. All three growth rates accelerated from the previous quarter.
|
Metric |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
Gross merchandise volume growth (YOY) |
32% |
32% |
26% |
32% |
35% |
|
Total payment volume growth (YOY) |
73% |
81% |
84% |
76% |
80% |
|
Unique active users growth (YOY) |
11% |
16% |
11% |
11% |
18% |
|
Revenue growth (YOY) |
74% |
67% |
57% |
61% |
57% |
Data source: MercadoLibre. Constant currency terms. YOY = Year over year.
Its gross margin expanded to 48.6% in the fourth quarter from 40% in the prior-year period, driven by a higher mix of higher-margin third-party marketplace sales (as opposed to lower-margin first-party sales) and the dilution of its shipping and payment processing costs. Its operating margin also rose from 1.1% to 11.6% as it reduced its cost of goods sold and reined in its marketing expenses. In short, economies of scale are kicking in and enabling the company to generate stable profits.
Plenty of long-term growth potential
In MercadoLibre's three largest markets -- Brazil, Argentina, and Mexico -- it posted 22%, 28%, and 83% year-over-year gross merchandise volume growth in constant currency terms in the fourth quarter. Growth in Brazil and Argentina accelerated from the third quarter, while its growth in Argentina slightly decelerated. Those robust growth rates indicate the Latin American e-commerce market still has plenty of room to grow, and that MercadoLibre isn't struggling against regional or overseas competitors.
According to Americas Market Intelligence, from 2021 through 2025, the e-commerce markets of Brazil, Argentina, and Mexico could grow at compound annual rates of 22%, 32%, and 24%, respectively. Meanwhile, challengers like Amazon and Sea Limited's Shopee are still struggling to match MercadoLibre's scale in Latin America -- where it established a firm first-mover advantage with a costly but comprehensive logistics network that spans 18 countries. That's probably why Shopee hastily retreated from several Latin American markets last year.
MercadoLibre leverages the strength of its e-commerce platform to lock more buyers and merchants into its fintech ecosystem, which grew its unique active users by 27% year over year to 43.7 million in the fourth quarter. Over half of those users were using its digital wallet, which can be used at other retailers and tethered to other digital banking services.
The challenges and valuations
MercadoLibre faces three near-term challenges: volatile exchange rates between Latin American currencies and the U.S. dollar (which reduced the company's reported year-over-year revenue growth by nearly 16 percentage points to 41% in the fourth quarter); economic turmoil and political unrest in Brazil and other Latin American regions; and rising interest rates, which make growth stocks look a lot less appealing than more conservative investments.
But despite all those challenges, analysts still expect MercadoLibre's revenue and earnings to grow by 24% and 69%, respectively, in 2023. Its stock might seem a bit pricey at 72 times forward earnings, but it arguably looks cheap relative to its top-line growth and trades at 4 times this year's sales. By comparison, Amazon trades at 70 times forward earnings and 2 times this year's sales -- but it's growing at a much slower rate than MercadoLibre.
Therefore, I still believe MercadoLibre is one of the best growth stocks to buy now. Its share price might remain volatile this year as investors shun growth stocks, but it could still generate much bigger returns over the next few years. That's why I'm keeping MercadoLibre as one of my portfolio's top holdings, and why I'd still buy more shares right now.
