MercadoLibre (MELI 0.39%) has been a fantastic stock to own this year, rising 37%. However, most of that rally occurred during January, as the stock is down 4% since Feb. 1. Wall Street analysts agree it has more room to run, as the average one-year price target is $1,600, implying a 37% upside.
But if you look at the company, it's clear that a 37% increase is just the beginning. MercadoLibre is poised for massive upside, and investors should strongly consider adding this stock to their portfolio before another run-up occurs. Read on to find out why.
MercadoLibre's products are growing in popularity
In Latin America, one company reigns supreme in the e-commerce space. MercadoLibre has multiple products spanning an online store, shipping logistics, digital payments, and consumer credit. With its wide reach in the region, MercadoLibre is poised to benefit from a growing middle class.
MercadoLibre's results have been outstanding, even throughout 2022, when many e-commerce companies struggled to grow due to difficult 2021 comparisons. In the first quarter, MercadoLibre's gross merchandise volume (GMV) rose 43% year over year, which marks an acceleration from Q1 (32%) and Q4 (35%) of 2022. Combine that increase with a growing take rate (how much MercadoLibre receives for each product sold on its platform), and you have a recipe for a company with strong pricing power.
On the fintech side of its business, MercadoLibre operates the popular Mercado Pago platform, which allows its users to invest, make peer-to-peer payments, or purchase products online. In just one year, MercadoLibre has grown its customer base from 35.8 million to 44.5 million, a 24% increase. However, these clients are using the platform more, as total transactions rose 72%, and total payment volume was up 96% in Q1.
That's impressive growth for the fintech side of the business, and it shows MercadoLibre's products are gaining a solid following. However, the stock is trading as if none of this is happening.
The stock is valued at historic lows
Despite MercadoLibre's overall revenue growth clocking in at 35% for the quarter, the stock remains valued at the lowest levels since the financial crisis of 2008 and 2009.
MELI Revenue (Quarterly YoY Growth) data by YCharts
For years, MercadoLibre averaged around mid-teens revenue growth, yet traded for 8 to 12 times sales. Now that the company is growing even faster, the stock trades for a lower valuation, which doesn't make sense. Furthermore, Wall Street analysts expect MercadoLibre's above-average revenue growth to continue, as they predict 28% growth for 2023 and 23% in 2024.
In addition to MercadoLibre's revenue growth, it's also becoming more profitable, with its profit margin steadily rising over the past two years.
MELI Profit Margin (Quarterly) data by YCharts
If you utilize 2024 estimates, MercadoLibre stock trades for about 50 times forward earnings -- an expensive valuation. However, if MercadoLibre can continue growing revenue quickly and steadily improve its margins, it has the potential to generate explosive returns.
Should MercadoLibre return to its bottom-end valuation of 8 times sales, where it has traded for the better part of the last decade, the stock would rise nearly 50%. Combine a cheap stock price with a growing company, and the stock looks like a no-brainer purchase.
MercadoLibre is a breath of fresh air in a market full of expensive stocks driven by artificial intelligence hype. Investors with a long-term time horizon should highly consider this stock, as its growth should allow it to crush the market over the next five years.
