Is It Too Late to Buy MercadoLibre Stock?

MercadoLibre (MELI 3.09%) posted its first-quarter earnings report after the market close on May 3. The Latin American e-commerce and fintech leader's revenue rose 35% year over year (58% in constant currency terms) to $3.04 billion and exceeded analysts' estimates by $160 million. Its net income more than tripled to $201 million, or $3.97 per share, which also cleared the consensus forecast by $0.84.

MercadoLibre's headline numbers were impressive, but its stock price dropped more than 5% the following day. Does that decline -- along with the fact that its stock has already risen more than 40% this year -- indicate its rally is running out of steam? Let's review the key facts and figures to see if it's too late to buy MercadoLibre's stock.

Image source: Getty Images.

Another quarter of accelerating growth

MercadoLibre's gross merchandise volume (GMV), or the value of all goods sold on its platform, rose 43% year over year in constant currency terms to $9.4 billion in Q1. Its total payment volume (TPV), which includes all the payments it processed through its Mercado Pago fintech ecosystem, surged 96% to $37 billion. Its total number of unique active users grew 25% to 101 million. All three metrics -- along with its total revenue -- accelerated from the fourth quarter:

Data source: MercadoLibre. Constant currency terms. YOY = Year-over-year.

MercadoLibre serves 18 different countries, but it generates most of its revenue from Brazil, Argentina, and Mexico -- which generated 28%, 107%, and 28% year-over-year constant currency GMV growth, respectively, in Q1. Brazil's and Argentina's growth accelerated from the fourth quarter, while Mexico's growth held steady.

MercadoLibre still has plenty of room to grow in those three core markets. According to Americas Market Intelligence, the e-commerce markets of Brazil, Argentina, and Mexico could still expand at compound annual growth rates (CAGR) of 22%, 32%, and 24%, respectively, between 2021 and 2025.

By comparison, analysts currently expect MercadoLibre's reported revenue to grow at a CAGR of 24% between 2022 and 2025. Those growth rates could be even higher if the currency headwinds across Latin America finally dissipate.

Its scale is improving and its margins are expanding

MercadoLibre established a first-mover advantage over the past two decades by building a comprehensive logistics network across Latin America's fragmented infrastructure and challenging terrain. That scale widened its moat against regional competitors like Americanas, which suffered a disastrous accounting scandal earlier this year, as well as overseas challengers like Amazon and Sea Limited's Shopee.

MercadoLibre also locked those users in with its Mercado Pago digital payments platform. Its unique fintech users grew 24% year over year to 44.5 million in Q1, and 24.2 million of those users were using its digital wallet services.

That scale and stickiness diluted its shipping and payment processing costs while enabling it to gradually reduce its marketing expenses. It also focused on selling more profitable products at its first-party marketplace while expanding its higher-margin third-party marketplace. As a result, the company's gross and operating margins expanded significantly over the past year.

Data source: MercadoLibre.

During the conference call, CFO Pedro Arnt said even though MercadoLibre's margins were consistently expanding, it would "continue to invest" in the growth of its ecosystem this year to "rapidly strengthen" its leadership position.

Between 2022 and 2025, analysts expect MercadoLibre's annual operating margin to expand from 9.8% to 13.8%, and for its net income to grow at a CAGR of 54%. We should take those estimates with a grain of salt, but MercadoLibre's current growth trajectory suggests it can easily hit those targets. If its valuations hold steady, its stock could potentially triple by 2025.

It's not too late to buy MercadoLibre

MercadoLibre's stock might look a bit pricey at 75 times forward earnings, but that higher multiple is justified because its profits are still rising very quickly. If we look at its top-line growth, it trades at 4 times this year's sales.

That makes MercadoLibre pricier than Amazon or Sea, which trade at 2 and 3 times this year's sales, respectively, but it's also growing much faster than both of those e-commerce giants.

I don't think it's too late to buy MercadoLibre. Its core growth engines are firing on all cylinders, its operating margins are expanding, its valuations are reasonable, and it has plenty of room to expand across Latin America. Its stock could remain volatile in this rough market for growth stocks, but it's still a solid long-term play for patient investors.