MercadoLibre (MELI 3.09%) may not be a household name in the U.S., but investors in the know are likely familiar with this e-commerce stock.
Sometimes known as the Amazon of Latin America, MercadoLibre has delivered smashing returns since its 2007 initial public offering, and it's still posting strong growth today. As the chart below shows, MercadoLibre has made early investors a small fortune, rising more than 4,000% since it first debuted:
However, as the saying goes, past performance is no guarantee of future returns. And MercadoLibre is now a much different company than it was when it first went public. So are its shares a buy today? Let's take a look at reasons why you should buy, sell, or hold MercadoLibre stock.
Buy MercadoLibre stock
First, the buy case. MercadoLibre's history of strong returns isn't an accident. The company has a long track record of delivering rapid revenue growth, and it continues to do so today.
In its second quarter, currency-neutral revenue rose 57% to $3.4 billion. This was driven by 47% currency-neutral growth in gross merchandise volume to $10.5 billion; total payment volume jumped 97% to $42.1 billion on a currency-neutral basis.
Those results were particularly impressive given that other e-commerce and digital payments companies, like Amazon and PayPal, have posted weak growth coming out of the pandemic. MercadoLibre, however, has been able to grow in spite of those headwinds.
The company is also rapidly gaining leverage on the bottom line thanks to the emergence of higher-margin areas like its marketplace, credit business, and advertising. In several ways, MercadoLibre is following Amazon's strategy of expanding into new businesses from its base in e-commerce.
MercadoLibre's operating margin improved to 16.3% in the quarter, and operating income more than doubled to $558 million. Profitability should continue to improve as those businesses contribute more of the company's revenue.
Image source: Getty Images.
Sell MercadoLibre stock
It's hard to question MercadoLibre's success as a business, as the numbers above indicate. And the company has fended off threats from competitors like Amazon and Sea Limited's Shopee. However, there are reasons why you may want to avoid or sell shares of MercadoLibre.
The biggest problem is probably its valuation. The stock isn't cheap -- it currently trades at a price-to-earnings (P/E) ratio of 84. The company also isn't immune to challenges in the Latin American economy, including inflation, the threat of a recession, and higher interest rates.
For example, Argentina, one of MercadoLibre's three biggest markets, is currently mired in an economic crisis; an estimated 40% of Argentinians live in poverty, and inflation on some products has doubled, making business challenging in that key market.
Hold MercadoLibre stock
Finally, the best argument for simply holding MercadoLibre stock is that the shares are fairly valued, given the risks in the business.
While the company's recent results have been impressive, analysts expect revenue growth to moderate. And in addition to the turmoil in Argentina, the global economy remains volatile, with oil prices high and interest rates remaining elevated in much of the world.
Holding the stock gives investors the opportunity to benefit from the upside potential, but also allows them to capitalize on any sell-off to add more of the stock.
What's the best move?
MercadoLibre might be expensive according to traditional metrics, but the stock is still worth paying up for today.
The company has built an impressive network of competitive advantages. These include a logistics operation, a digital payments ecosystem with point-of-sale devices serving brick-and-mortar merchants, a financing arm, and a budding advertising business layered on top of its e-commerce marketplace.
MercadoLibre also has a large addressable market to penetrate in Latin America, as the middle class expands and it builds out its presence across the region.
While the stock is likely to be volatile, especially with the broader uncertainty in the stock market and the global economy, the upside potential remains considerable for the Latin American e-commerce leader.
