Stock splits are exciting. Not because they have any impact on the underlying business, but rather because they spotlight businesses whose shares have appreciated substantially. That rarely happens in the absence of financial fortitude, so stock splits can helps investors suss out superior businesses.
Consider the following list of somewhat recent stock splits. Every company has some sort of competitive advantage, and every stock beat the S&P 500 over the last five years.
- Apple: 4-for-1 split in August 2020
- Alphabet: 20-for-1 split in July 2022
- Churchill Downs: 2-for-1 split in May 2023
- Dexcom: 4-for-1 split in June 2022
- Monster Beverage: 2-for-1 split in March 2023
- Nvidia: 4-for-1 split in July 2021
- Palo Alto Networks: 3-for-1 split in September 2022
- Shopify: 10-for-1 split in June 2022
- Tesla: 3-for-1 split in August 2022
MercadoLibre (MELI 3.09%) checks the same boxes, but the company has never split its stock, even though its share price appreciated 928% in the past decade.
Here's why this growth stock is worth buying.
MercadoLibre is a pillar of the Latin American digital economy
MercadoLibre operates the largest online commerce and payments ecosystem in Latin America. It accounted for 29% of domestic e-commerce sales last year, more than the next three digital retailers combined, and Morgan Stanley sees its market share reaching 31% by 2027. That momentum can be attributed to its position as the most-visited online marketplace in the region and its broad portfolio of adjacent services.
MercadoLibre receives nearly four times as many monthly visitors as its closest competitor. That alone creates a powerful network effect. But the company reinforces its value to merchants with logistics services and ad tech software, and it does so to great effect. Its logistics subsidiary Mercado Envíos offers the fastest delivery times across all key geographies, and its ad tech subsidiary Mercado Ads is the regional leader in retail advertising.
MercadoLibre further accelerates the network effect behind its commerce business by offering fintech services to merchants and consumers, including payment processing, credit and debit cards, and loans. Notably, its Mercado Pago subsidiary is the sixth-largest but fastest-growing merchant acquirer (i.e., the entity that settles transactions for merchants) in Latin America, and the third-most popular domestic digital wallet.
MercadoLibre is growing at a fantastic pace
MercadoLibre earns commerce revenue from seller fees, logistics services, and ad sales, and it earns fintech revenue from transaction fees, credit and debit card fees, and interest on loans.
Quarterly commerce revenue grew at 49% annually over the last three years to reach $1.9 billion in Q2 2023, driven higher by upward momentum in marketplace gross merchandise volume and merchant adoption of logistics and advertising solutions. Meanwhile, quarterly fintech revenue grew at 71% annually over the last three years to reach $1.5 billion in Q2 2023, driven higher by increases in on- and off-marketplace payment volume and total credit portfolio.
The chart below shows quarterly commerce and fintech revenue, as well as the three-year compound annual growth rate for both revenue streams.
Revenue growth has slipped below the three-year average, but that unavoidable development should give investors no pause. MercadoLibre is still growing like wildfire.
Total revenue increased 31% to $3.4 billion in the second quarter -- representing 38% growth in the commerce segment and 24% growth in the fintech segment -- and GAAP earnings jumped 112% to $5.16 per diluted share. That exceptional bottom-line growth can be attributed to increasingly efficient scale, more stringent underwriting, and general cost control efforts.
Going forward, investors have good reason to believe MercadoLibre can maintain its growth trajectory.
Why MercadoLibre stock is a screaming buy
Latin American retail e-commerce sales and digital payment volume are projected to increase at 13% and 15%, respectively, through 2027. Additionally, digital ad spending is forecasted to increase 14% in 2023, and that market should continue to expand swiftly in future years. But MercadoLibre should outpace the industry average on all counts given its position as the largest commerce and payments ecosystem in Latin America, and the domestic leader in retail advertising.
Indeed, Morgan Stanley says MercadoLibre could grow revenue at 20% annually (or faster) through 2027. That makes its current valuation of 5.6 times sales look cheap, especially when the three-year average is 10.4 times sales. For that reason, investors should feel confident buying this growth stock today. Whether or not MercadoLibre splits its stock in the future is immaterial.
