In 2020, the pandemic's onset proved a huge boon for e-commerce platforms as people turned to online shopping for their everyday needs. Sales surged through the roof in the next two years for these companies.
Optimistic investors even anticipated that online sales would perpetually surpass pre-pandemic levels, sustaining rapid expansion. However, reality unfolded differently. As global economies reopened and people gradually returned to physical shopping, e-commerce companies like Amazon, Etsy, and Shopify have experienced various degrees of slowdown.
But Latin American e-commerce platform MercadoLibre Inc (MELI -1.79%) has been a notable outlier. Let's see why -- and whether this provides an opportunity today for investors.
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Executing at a world-class level
MercadoLibre has been a great growth stock. Since it went public in 2007, revenue has grown from just $52 million in 2006 to nearly $6.2 billion in 2021. And when even the most bullish investors expected a more "normalized growth" in 2022, the company blew everybody away with its solid performance.
In 2022, MercadoLibre delivered revenue growth of over 55% (after adjusting for fluctuations in foreign currency exchange rates) for each of the four quarters. If that's not convincing enough, it posted another 58% growth in revenue in the first quarter of 2023. Operating income also reached a record high of $340 million in that quarter, more than double that of last year.
The company's success is a result of its localized approach to e-commerce. With a deep understanding of the Latin American market, MercadoLibre tailors its operations, services, and marketing strategies to suit the needs of the local population. This localized approach gives the platform an edge over international competitors, including Amazon, which has generally struggled to adapt to the region's nuances.
And thanks to its localized approach, MercadoLibre has built a strong brand presence and established trust among customers in Latin America. With such trust, the company is expanding further into adjacent services such as digital payments and fintech, cementing its leadership in the digital ecosystem in this region.
What lies ahead for the company?
While past performance is no guarantee of future results, there are good reasons to expect MercadoLibre to keep growing in the years to come.
First, the Latin American region is experiencing a rapid increase in e-commerce adoption. According to Statista, e-commerce sales as a percentage of retail for this region is 11%, much lower than other countries like China (more than 20%) or the U.S. As more people access the internet and smartphones, online shopping will grow. MercadoLibre, the leading e-commerce platform in Latin America, stands to benefit from this trend.
Latin America also has a young and rapidly expanding middle class. The demographic shift presents a tremendous opportunity for MercadoLibre. As disposable incomes rise and more individuals become digitally connected, the demand for online shopping will naturally grow. MercadoLibre's extensive regional reach and established mindshare make it a natural choice for people seeking a wide range of products and services.
Moreover, the company continuously innovates and adds new services to delight its customers. It might have started in e-commerce, but it has added other services like logistics, digital payment, credit, and others over the years to capture a higher wallet share from customers.
Despite the massive tailwinds, the bears are concerned about the increasingly competitive e-commerce landscape. But while MercadoLibre is not the only player in the region -- other players like Shopee, Shein, and Amazon are all working to grow their presence -- the company has the most comprehensive digital product offerings and ecosystem in this region, thanks to its long operating history and customer understanding.
Besides, as the e-commerce market in Latin America is massive (and growing), it can afford to have more than one player. Investors can expect MercadoLibre to keep growing for years.
What should investors do now?
While MercadoLibre has demonstrated solid execution and significant growth potential, it is still essential that investors maintain a margin of safety and not overpay for the stock.
Currently, the e-commerce powerhouse sports a premium valuation. Its price-to-sales ratio stands at 5.6 compared to 2.1 for Amazon. It makes sense for MercadoLibre to trade at a premium valuation amid its growth prospects. But whether it is reasonable for the stock to trade at more than twice the valuation of Amazon is debatable.
For most investors, it would be imprudent to take a full position in the stock. Instead, they might initiate a small holding and add to it over time. And for those unwilling to invest for the long term (more than five years), it's probably best to avoid the stock altogether.
