Fewer things spark interest in a stock more than a stock split. Even though this is primarily a cosmetic action (because it doesn't do anything to affect the core value of a company), a lower stock price may give more investors access to the stock, especially if their brokerage doesn't offer fractional shares.
One stock that could be reaching the point of a stock split is Latin-American e-commerce giant MercadoLibre (MELI -1.85%). Let's dive into why I think it could be next and any implications that may have.
Stock splits actually provide some value for the company
Since going public at $18 per share in 2007, MercadoLibre hasn't split its stock once. With the stock around $1,200 now, it could be nearing a point where it makes sense.
So why would MercadoLibre do it? First, stock-based compensation has become a popular way to incentivize employees, primarily through stock options. With most stock options representing 100 shares, issuing one of these to employees could cost more than $100,000, making it an impractical option for most employees. However, if the stock is split into 10 pieces, this becomes a more affordable $10,000 grant, potentially giving the company a way to reward employees when the company does well.
Second, reducing the share price helps smaller investors own shares. Outside the U.S., fractional shares aren't as common. Say you live in Latin America and want to invest in MercadoLibre -- because they have an online store, deliver your packages, and facilitate payments, you'd have to buy an expensive $1,200 share. Cutting that price down might allow more people to own stocks and allow MercadoLibre to fulfill its mission to "democratize commerce and payments."
While these are great benefits to splitting the stock, it means nothing if the company doesn't execute and shares plummet. Fortunately for MercadoLibre, the business execution will keep that from happening.
MercadoLibre is executing well, and the stock is undervalued
Despite its heavy e-commerce exposure, MercadoLibre did well in 2022, even when many retailers saw their year-over-year comparisons go in the negative direction. Commerce revenue reached $1.66 billion in the fourth quarter, growing a currency-neutral 36% year over year. Its fintech division grew even quicker, with revenues rising 93% to $1.34 billion, thanks to its new Mercado Credito division.
Overall, MercadoLibre grew 56% in Q4, capping an end to an excellent year. 2023 and 2024 are also projected to be strong, with revenue growth of 24% projected by Wall Street analysts for both years. Those stats sound like a stock primed to move higher in the coming years, but I haven't even talked about the biggest catalyst yet.
Because MercadoLibre is associated with commerce, it sold off hard in 2022. Now, it's to the point where the stock has become undervalued compared to its long-term average.
MELI PS Ratio data by YCharts.
Even if MercadoLibre returns to a historically cheap 8 times sales, that implies a 36% upside to the stock, without even factoring in future revenue growth.
Additionally, MercadoLibre is quickly becoming profitable, with its profit margin rising from a 2.2% loss in Q4 last year to a 5.5% profit this year. That marks three consecutive quarters with a positive profit margin, making it evident that MercadoLibre could begin producing substantial profits from here on out.
All of this combined will likely lead to a higher stock price, further increasing the probability that MercadoLibre splits its stock for the reasons discussed above. Regardless of whether a stock split occurs or not, the shares look attractive at these prices and have a bright future ahead.
