If you had the opportunity to go back and buy Amazon stock, almost any investor would take it.
Well, you can't do that without a time machine, but you can buy another stock that bears a striking resemblance to where Amazon was a decade or so ago.
That's MercadoLibre (MELI 3.09%), a Latin American e-commerce and digital payments company. Like Amazon, MercaodLibre started as a direct online retailer and has expanded from there into a wide range of businesses, including logistics, a third-party marketplace, digital payments, financing, and advertising. Furthermore, it's built an impressive set of competitive advantages along the way that is delivering rapidly expanding profit margins.
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Another monster quarter
The Q2 results showed MercadoLibre continues to deliver strong growth at a time when much of the e-commerce sector has struggled.
Revenue growth in the second quarter actually accelerated from Q1, clocking in at $3.4 billion, up 57.2% on a currency neutral basis and topping analysts' estimates of $3.3 billion.
Both of its core businesses put in good performances, with gross merchandise volume rising 47.2% on a currency neutral basis and total payment volume increasing 96.6% to $42.1 billion.
Even better, profitability is soaring thanks to the emergence of higher-margin segments like payments, its third-party marketplace, advertising, and credit.
Operating income more than doubled in the quarter from $250 million to $558 million, and its operating margin improved to 16.3%. Generally accepted accounting principles (GAAP) earnings per share also more than doubled from $2.43 to $5.16, beating analysts' estimates for EPS of $4.54.
Among the drivers of that improving profitability was its advertising business, which generated more than 70% revenue growth for the fifth straight quarter as it made a number of improvements to the ads business, including tapping into a wider audience and refining the bidding process.
Based on Amazon's experience, where advertising generates roughly $40 billion in annual high-margin revenue, MercadoLibre's ad business should have a bright future because it benefits from the same advantages of being at the bottom of the marketing funnel, or where purchasing decisions are made. Unlike, say, a search engine, consumers tend to come to an e-commerce site with a clear intention to make a purchase.
MercadoLibre also reported strong results in Brazil, its biggest market and where roughly half of its revenue comes from. MercadoLibre seemed to take advantage of the bankruptcy of its close rival, Americanas, earlier this year. Its brand consideration scores reached all-time highs and it gained market share.
The future is bright for MercadoLibre
MercadoLibre operates across much of Latin America, where it has a large addressable market and an expanding middle class, and its network of businesses gives it a competitive advantage much like Amazon enjoys in the U.S.
Management also noted that in Argentina, where its e-commerce business has struggled, MercadoPago picked up the slack because the difficult macroeconomic climate led to increased adoption of MercadoPago's investment product, showing another unique benefit of its business model.
Meanwhile, MercadoLibre stock is looking much more reasonably priced with profits doubling. Based on 2024 estimates, the stock trades at a forward price-to-earnings ratio of less than 50, and analysts are likely to hike those estimates following the strong second-quarter earnings report.
MercadoLibre has continued to grow even as other e-commerce businesses have stalled out.
The stock has been a big winner throughout its history, and that pattern should continue as the company takes advantage of large, expanding addressable markets in e-commerce and digital payments, and leverages its leading position in Latin America.
From that perspective, MercadoLibre looks well positioned to deliver Amazon-like returns over the next decade.
