Is MercadoLibre Stock a Buy Now?

MercadoLibre's (MELI 3.09%) stock has soared nearly 60% this year. The Latin American e-commerce and fintech leader repeatedly impressed the bulls with its rapid growth rates, its expanding margins, and its soaring profits. But does it still have room to run? Let's review its business model, growth rates, and valuations to decide.

Understanding MercadoLibre's business

MercadoLibre operates its online marketplace in 18 Latin American countries, but it generates most of its gross merchandise volume (GMV, or the total value of all goods sold on its platform) in Brazil, Mexico, and its home market of Argentina.

It also deploys its own digital payments platform, Mercado Pago, to process payments for its own marketplace and third-party merchants. Mercado Pago serves as the foundation for MercadoLibre's other fintech services -- which include its Mercado Crédito loans, crypto trading services, and its own Mercado Coin digital currency.

Image source: Getty Images.

How fast is MercadoLibre growing?

MercadoLibre was founded 24 years ago, but it's still growing like a weed. Between 2017 and 2022, its annual revenue grew at a compound annual growth rate (CAGR) of 50%.

Over the past year, its year-over-year growth in GMV, total payment volume (TPV), and unique active users have all accelerated as it generated about 50%-60% revenue growth every quarter in constant currency terms.

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

That growth was driven by its double-digit and triple-digit GMV growth across Brazil, Mexico, and Argentina. MercadoLibre's first mover advantage, expansive logistics network (which crosses some difficult terrain), and the stickiness of its fintech ecosystem have also prevented foreign challengers like Amazon (AMZN 3.43%) and Sea Limited's (SE 0.05%) Shopee from gaining a meaningful foothold in Latin America.

Yet MercadoLibre still hasn't saturated the Latin American market. It served 135 million unique active users in the first half of 2023, which is only about a fifth of the population of Latin America and the Caribbean. Latin America's e-commerce penetration rate only reached 11.7% at the end of 2022, according to Latitud, compared to China's penetration rate of 27.7%. Mordor Intelligence expects the Latin American e-commerce market to grow at a CAGR of 19% from 2023 to 2028.

Why are MercadoLibre's margins expanding?

For many years, the bears claimed MercadoLibre would never generate stable profits. But it generated a net profit of $83 million in 2021, which surged 481% to $482 million in 2022. Analysts expect its net profit to grow another 114% to $1.03 billion in 2023.

Three catalysts are boosting MercadoLibre's profits. First, economies of scale are kicking in and diluting its shipping and payment processing costs. Second, the stickiness of its ecosystem enables it to finally rein in its marketing expenses. Lastly, it's been expanding its higher-margin third-party marketplace and selling more profitable products on its first-party marketplace. A look at its gross and operating margins over the past year reveals just how effective those strategies are.

Data source: MercadoLibre. Constant currency terms.

For reference, Amazon's international business ended the second quarter of 2023 with a negative operating margin of 3%. Sea's Shopee -- which generates most of its revenue in Southeast Asia and Taiwan instead of its fledgling Latin American marketplace -- achieved a positive operating margin of 5.5% in its latest quarter.

Is MercadoLibre reasonably valued right now?

Analysts expect MercadoLibre's revenue to grow at a CAGR of 25% from 2022 to 2025 in USD terms. That might be slower than its growth rate over the past five years, but it could still expand much faster than Amazon -- which is expected to grow its annual revenue at a CAGR of 11% during the same period. Analysts also expect MercadoLibre to grow its annual net income at a CAGR of 61%.

We should take those long-term estimates with a grain of salt, but MercadoLibre's current growth trajectory suggests it has plenty of room to grow. Its enterprise value of $65 billion also makes it tiny compared to Amazon, which is worth $1.5 trillion.

MercadoLibre trades at 49 times next year's earnings and 4 times next year's sales. By comparison, Amazon trades at 46 times next year's earnings and 2 times next year's sales. MercadoLibre's stock only seems slightly pricier than Amazon's, but it's growing at a much faster rate and has a lot more upside potential. Therefore, I believe MercadoLibre is still a great buy right now -- and it has the potential to generate market-beating gains over the next few years.