Latin America is a massive region, home to more than 670,000,000 people. People living there are increasingly becoming able consumers as their economies hook into the internet, bringing modern luxuries like e-commerce into the fold.

MercadoLibre (MELI -2.93%) has been there since 1999, steadily building a network of fulfillment centers and technology to support the Latin American consumer. Now it looks like MercadoLibre is getting ready to harvest the fruit of its years of work.

Investors looking to be in the right place at the right time should consider adding this emerging markets powerhouse to a diversified long-term portfolio. Here is why.

Achieving operating leverage during the pandemic

You could think of MercadoLibre as Latin America's version of Amazon. While not quite as dominant as Amazon is in America, MercadoLibre has carved out more than 21% of online retail sales in the region. Since starting with e-commerce, it's built other consumer-centric services into its business, including digital wallets and shipping services. These are useful for consumers in a country where banking and logistics are inconsistent, especially in more remote locations.

MercadoLibre has been steadily growing for years, but the pandemic took the company to a new level. It did just $1.4 billion in 2018 but $10.5 billion in 2022, which you can see below. COVID-19 pushed consumers to adopt digital goods and services. MercadoLibre's gross merchandise volume (GMV) has grown more than two-fold, and fintech payment volumes have increased by five-fold over the past three years.

MELI Revenue (TTM) Chart

MELI Revenue (TTM) data by YCharts

MercadoLibre's revenue has grown faster than its expenses, driving its profits up. It's a phenomenon often called "operating leverage" and can be a precursor to rapid earnings growth when profits continue compounding as the business grows.

Earnings growth could play catch-up

You can zoom in on MercadoLibre's earnings per share (EPS) in the below chart, which shows how earnings growth exploded on the back of its recent revenue growth:

MELI Normalized Diluted EPS (TTM) Chart

MELI Normalized Diluted EPS (TTM) data by YCharts

MercadoLibre probably won't maintain its torrid growth from recent years, but the future still looks bright. There remains a long-term path for expansion in Latin America. For example, MercadoLibre's fintech user base grew by 27% year over year in the fourth quarter to 44 million, and that's still a relatively small chunk of the overall Latin American population.

Analysts are optimistic, estimating revenue growth averaging roughly 20% over the next several years. Thanks to operating leverage, that could mean robust earnings growth comes with it. Analysts are calling for annual EPS growth averaging 42% over the next three to five years.

Its valuation looks attractive today

Some might consider MercadoLibre a growth stock, but that doesn't mean profits don't play an essential role in valuing the company. Sure, you could look at a revenue-driving metric like the price-to-sales (P/S) ratio and see that the stock is trading at its lowest valuation in over a decade. However, you could also use earnings now that MercadoLibre is profitable.

In that case, the stock trades at a price-to-earnings (P/E) ratio of 135 -- yikes! But a little math can show how quickly that could become reasonable. MercadoLibre earned $9.53 per share in 2022. Let's fast-forward five years. Assuming the company's EPS grows 40% annually on average -- which is according to estimates -- then its earnings would increase as follows:

Year EPS
2023 $13.34
2024 $18.67
2025 $26.15
2026 $36.61
2027 $51.25

Source: Calculations by author

Using the hypothetical 2027 EPS, the stock's forward P/E is about 25. That still might seem expensive, but consider how many years of growth likely remain. MercadoLibre is probably not going to grow at such a rate and then stop. Instead, EPS might steadily slow but still easily outgrow the broader market.

If you're in this for the long term, you let a great company continue expanding and compound its profits (and your investment returns). That's the superpower of buying and holding great businesses.