Shares of MercadoLibre (MELI 3.09%) have been on a tear since bottoming in the middle of last year. The stock is currently up around 45% over the last six months and could have more upside.
Despite uncertainty around consumer spending, the digital payments provider has produced robust growth. Here are three reasons why investors shouldn't hesitate to buy this growth stock at these highs.
1. Strong growth in a challenging environment
If you're interested in the megatrend of e-commerce growth, the leading digital payments provider in Latin America is a good choice. Latin America has one of the largest internet populations in the world, and it's also one of the fastest-growing e-commerce markets.
We can see these factors at work in MercadoLibre's recent performance. Total payment volume grew nearly 60% year over year in 2022. MercadoLibre operates the leading marketplace, and one of the most popular digital wallets, in Latin America. Over the next four years, Morgan Stanley analysts see MercadoLibre's marketplace, credit business, and first-party merchandise sales driving most of the company's sales growth.
With 44 million unique active fintech users, MercadoLibre has an enormous opportunity to cross-sell other financial services, which is a catalyst for higher margins.
2. Profitable growth not appreciated by the market
One of the additional revenue sources that is starting to blossom for the company is advertising. Mercado Ads represent just 1.4% of gross merchandise volume in the fourth quarter. Revenue from ads has grown fivefold over the last three years.
Mercado Ads allows other businesses to market their products on the company's marketplace. Advertising generates higher-margin fees than marketplace transactions and other sources of revenue.
The company's profit margin has been increasing but is still behind its U.S. counterpart PayPal, signaling plenty of room for further improvement.
Data by YCharts
Over the next five years, analysts expect MercadoLibre to grow earnings per share by 44% per year on an annualized basis. This high rate of earnings growth should support the stock's high forward price-to-earnings (P/E) ratio of 77 at the time of this writing.
The stock might look expensive, but when considering where the company is headed, it's worth paying up for. For example, the stock's forward P/E drops to 54 when looking at next year's consensus earnings estimate.
Data by YCharts
3. Sustainable high growth
Over the last three years, payment volume has increased fourfold, fintech revenues are up nearly fivefold, and gross merchandise volume more than doubled.
MercadoLibre has come a long way, but not far enough. Brazil is the largest fintech market in Latin America and the fifth largest in the world, according to the International Trade Administration. Even in a more developed market like Brazil, management expects the market to support growth between the mid- to high teens.
When considering its ability to gain market share, MercadoLibre can sustain long-term annualized revenue growth of around 20%. The company is investing to expand its digital wallet to offer a complete suite of financial services beyond facilitating in-store payments.
The recent market sell-off is a great time to buy shares ahead of these opportunities.
