One smart way to find success in the market is by investing in stocks that offer growth at a reasonable price. But the so-called "GARP" strategy is harder to execute than it sounds. After all, a lot of growth stocks, especially in sectors like software, already trade at speculative valuations that jeopardize their ability to beat the market over the long term.
For a long time, MercadoLibre (MELI -1.79%) was one of them. The Latin American e-commerce leader has long delivered high growth, but its profits had been minimal.
However, the company's fourth-quarter earnings report shows that's starting to change as its MercadoPago, advertising, and credit businesses, among others, gain leverage.
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Growth at a reasonable price
In Q4, currency-neutral revenue jumped by 56.5% to $3 billion, edging out the analysts' consensus estimate of $2.96 billion. Once again, that growth was driven largely by e-commerce, with gross merchandise volume up 34.7% to $9.6 billion, and MercadoPago, which saw total payment volume jump 80% to $36 billion.
However, the bottom-line growth was the real highlight for investors as the company posted an operating margin of 11.6%, a new record, which translated into $349 million in operating income. Earnings -- where it booked a loss of $0.92 per share in the prior-year quarter -- surged into the black to the tune of $3.25 per share, easily topping analysts' consensus estimate of $2.40 per share.
Even better, the company reported free cash flow of $2.5 billion for 2022. As such, the stock trades at just 24 times trailing free cash flow. That's an excellent valuation for a company growing as fast as MeracdoLibre with large addressable markets in several categories to penetrate.
Management credited that growth to a number of "building blocks" it has invested in over the last few years. Those include increasing the speed of its logistics network, which went from delivering 44% of its gross merchandise volume in 2019 to almost 80% in 2022; building a suite of financial services including cards, credit, insurance, and savings that leveraged its customer base of 44 million MercadoPago users to grow fintech revenues by a factor of five over the last three years; and continuing to grow its high-margin ads business, where revenue reached 1.4% of gross merchandise volume in the fourth quarter, meaning that it's more than five times larger than it was three years ago.
There's still a long runway ahead
What makes MercadoLibre especially well-priced now isn't just its free cash flow valuation.
The company's growth prospects remain bright, and it keeps finding new ways to grow. It's expanding in a large market with a growing middle class. It has successfully fended off competitive threats in Brazil from Amazon and Sea Limited's Shopee, and one of its biggest local rivals, retail chain Americanas, just imploded after an accounting scandal.
While the e-commerce business anchors MercadoLibre, its brightest star may be MercadoPago, which extends beyond the company's ecosystem. Its point-of-sale (POS) systems have been installed in brick-and-mortar stores across Latin America, and that part of the business reached $25 billion in off-platform total payment volume in the quarter.
Meanwhile, the company is just starting to ramp up its credit business, which reached the end of the quarter with a $2.8 billion portfolio, though it's exercising caution until it's confident that the credit cycle has turned.
Finally, its advertising business also has considerable potential. The company plans to launch its own demand-side platform next year as it aims to build a complete ad tech platform in Latin America. For comparison, revenues from Amazon's ad business are about 6% of its GMV. If MercadoLibre's ad business becomes similarly important to it, it could expand by four times as a share of GMV.
MercadoLibre doesn't offer quarterly guidance, but management summed up its current position this way in its shareholder letter: "Our results in the fourth quarter provide a good example of how a combination of strong execution, increased scale, solid competitive advantages, and appropriate long-term thinking can yield high growth and market share gains alongside robust profit increases."
The company is growing rapidly at a time when its North American counterparts in e-commerce and fintech are running into a wall, and the stock is cheap as it's ever been. It's a great opportunity for investors to pick up shares of MercadoLibre stock.
