Here's My Top Growth Stock to Buy Now

The term "growth stock" gets thrown around a lot and can have different meanings to different people. When I use the term, I'm referring to a company firmly in the stage of its life as a company where it is growing its revenues as well as the scope of its business. 

There are few companies that fit that description more than MercadoLibre (MELI -1.79%). Despite the fact it's been a public company for nearly 16 years, it's still adding services and expanding its reach in Latin America. There are a lot of growth stocks I think are great buys right now, but MercadoLibre sits at the top of that list. 

Many products in many countries

MercadoLibre has grown its product offerings and business lines over the years, and now offers six services that span its e-commerce and fintech segments. The two most notable are the Mercado Libre Marketplace and the Mercado Pago fintech platform. However, there is also a logistics service, an ads solution, a classifieds service, and an online storefronts solution. 

The marketplace solution is available in 18 countries in Latin America, while the fintech platform and logistics business is available in eight countries. MercadoLibre's credit business is still expanding and is currently only available in four countries.

It's clear that MercadoLibre is offering many essential services to a part of the world that needs them. The results make it even more clear that the company is doing this successfully.

Strong and sustained growth

In Q4 2022, MercadoLibre reported total revenue of $3 billion, which was a year-over-year increase of 41%. Because MercadoLibre operates in several countries but reports in U.S. dollars, there were some significant foreign exchange challenges to deal with.

If we ignore those exchange headwinds, revenue increased by 56% over Q4 2021. On a foreign exchange-neutral basis, revenue growth has been above 56% in every quarter of the past year.

Perhaps more impressive is the progress MercadoLibre has made on its margins over the past year.

Data source: MercadoLibre. Bps = basis points = 1/100th of a percentage point.

This operating efficiency and growth on the bottom line is an important trend to see. Revenue growth has never been a problem for MercadoLibre, but profitability was inconsistent prior to last year.

Mercado Pago is gaining momentum

Digging one layer deeper into the revenue results, the growth has been more impressive in the Fintech segment. In Q4, Fintech revenue grew by 93% while Commerce revenue increased by 36%.

This is becoming more important to keep an eye on, as Fintech is becoming a larger part of overall revenue over time. For example, in Q4 2021, the Fintech segment accounted for 36% of overall revenue. In Q4 2022, this percentage jumped to 45%.

As Mercado Pago becomes a larger, more important part of MercadoLibre's overall business, it's worth paying closer attention to more of its user and volume metrics. 

Data source: MercadoLibre.

Investors should keep an eye on these metrics over the coming quarters to watch for any slowing, but as MercadoLibre adds more products and services to its suite of offerings, it provides more revenue streams for Mercado Pago.

For example, the company's credit offering product has a credit card that got off to a bumpy start in 2022. Management feels they've learned some lessons through that process and expects its credit card to be a key value driver for Mercado Pago. 

A compelling valuation

Despite MercadoLibre's long track record of success, the recent bear market pulled the stock down to the lowest valuation it had seen in years. Within the last year, the stock traded for as little as 3.6 times sales and 17 times free cash flow. Today, MercadoLibre's price-to-sales multiple is 5.1, and its price-to-free cash flow ratio is 26. These multiples are higher now, but still lower than their historical average.

Considering the value MercadoLibre brings to millions of people all over Latin America and its success over almost two decades executing its business plan, the current valuation is attractive to me. For all these reasons, I have MercadoLibre at the top of my buy list, and I expect it will remain there moving forward.