Since the stock of MercadoLibre (MELI -1.79%) hit its 52-week low on June 14, 2022, it has been on fire, up 100%, versus the S&P 500, which only rose 6%. However, despite recently beating analysts' revenue and earnings guidance, the stock only gained 2% the day after releasing its fourth-quarter 2022 results.
Investors are likely reluctant to bid the stock up much higher in the near term due to its massive run-up over the last eight months, combined with the economy in its largest market, Brazil, facing high inflation, slowing growth, declining living standards, and growing social discontent.
So with the stock's momentum stalling in the near term and a gloomy outlook for growth in Brazil in 2023, should you put this stock on your buy list?
Positioned to dominate Latin America
Despite the terrible economic environment in Latin America since the pandemic, MercadoLibre has built a gross merchandise value (GMV) base, the total value of merchandise sold, 2.5 times larger than in 2019, establishing itself as the clear e-commerce market leader in Latin America.
The company grew its logistics network from delivering an average of 44% of its GMV within 48 hours in 2019 to almost 80% in 2022 -- incredible expansion of its network in an area of the world notable for its poor logistics.
MercadoLibre uses the same playbook in Latin America that Amazon used to dominate the U.S. e-commerce market: win by providing the best assortment of products, prices, and fast delivery. These advantages showed up in MercadoLibre's 2022 online retail sales Black Friday campaign in Brazil, which grew 19%, materially outperforming a weak market that shrank 25% from the previous year's Black Friday campaign.
In addition, the company dominated during El Buen Fin, an annual November nationwide shopping event in Mexico. During the 2022 event, it grew unique buyers by 20% over the previous year's comparable quarter -- a display of its strength in Mexico, now its fastest-growing market based on volume.
While MercadoLibre is grabbing market share, its Latin American competitors have crumbled in a poor economic environment. For instance, its most significant competitor in Brazil, Americanas, filed for bankruptcy in January. The diverging fortunes between MercadoLibre and direct competitors are likely why the stock is up 41.94% year to date, outperforming most publicly traded e-commerce marketplaces globally.
Great end-of-year results
One significant milestone MercadoLibre crossed in 2022 is that full-year revenue exceeded $10 billion for the first time, a new record. Perhaps even more impressive is that it outperformed the market in the holiday quarter, a critical quarter for many online retailers.
As seen in this chart, during a year when most global e-commerce platforms saw fourth-quarter year-over-year quarterly revenue fall into the single digits, MercadoLibre maintained 41% revenue growth on a U.S. dollar basis and 57% when neutralizing the impact of foreign-currency exchanges.
MELI Revenue (Quarterly YoY Growth) data by YCharts
The company also has positive and rising profitability -- something few companies can claim under current economic conditions.
MELI Operating Margin (TTM) data by YCharts
Between solid revenue growth and increasing profitability, its annual operating income increased by 134% year over year to just over $1 billion for the first time -- another milestone. Shareholders should be pleased that management ended 2022 delivering on its promise of sustainable growth in profit dollars.
Advertising could further boost growth moving forward
Advertising should become a significant growth engine for the company over the next several years, as e-commerce marketplaces can provide effective and cheaper online advertising.
During 2022, management ramped up investment in advertising technology, doubling its adtech workforce within half a year. The company also made significant advertising enhancements from the fourth quarter of 2022 into 2023.
Ad technology improvements include:
- Improved targeting capabilities
- Deploying an ad server
- An automated dashboard for real-time reporting for display performance
- Augmenting the ad bidding process
- Improved placement logic of product ads
The company already is seeing some of the fruits of those investments. In the fourth quarter, it reported Mercado Ad revenue reached 1.4% of GMV -- five times the size it was three years ago.
MercadoLibre expects to launch a DSP (demand side platform) in 2023, which should further boost its capabilities and help it build a world-class ad tech platform in Latin America. If it succeeds like Amazon's ad platform, advertising could evolve into one of its most significant growth opportunities.
Should you buy the stock?
The market values MercadoLibre stock at a price-to-sales (P/S) ratio of about 5.80, well below its median P/S ratio of 10.45 over the last 10 years. Still, it is one of the highest-valued global e-commerce websites at a time when online marketplaces are decidedly out of favor due to the terrible global economy. Considering the risks in the current environment, the stock is fairly valued.
MELI PS Ratio data by YCharts
If you bought MercadoLibre today, the stock could flatline or drop in 2023 because of headwinds from the poor economic environment in Latin America. However, purchasing the stock today could help supercharge a patient investor's portfolio over the next five years as economies in the area eventually recover and investor sentiment toward e-commerce marketplaces turns more favorable.
