Over the past decade, share prices of Latin American e-commerce giant MercadoLibre (MELI 3.09%) have pulled back from all-time highs by 25% or more at least seven times. In six of those cases, MercadoLibre stock eventually bounced back to new highs. The seventh time is right now.
As of this writing, MercadoLibre stock is trading down 37.6% from an all-time high reached in early 2021. Given the company's potential at the moment, Wall Street believes this is a screaming-buy opportunity. Of the analysts tracked by TipRanks, 15 cover MercadoLibre stock. Of these, 12 believe it's a stock to buy with an average price target roughly 32% higher than where it trades today.
Wall Street is bullish on MercadoLibre stock for good reason.
What to know about MercadoLibre
Over 20 years ago, MercadoLibre set out to build an e-commerce platform in the underserved market of Latin America. It's a great idea and the company experienced a measure of success right from the beginning.
However, to truly thrive in that market, MercadoLibre had to solve two massive problems. First, many of its target customers didn't have bank accounts and only used cash. Second, infrastructure for shipping was sorely lacking in its key markets.
MercadoLibre set out to solve the first problem with financial technology (fintech) through its Mercado Pago business. And it's been a runaway success. As of the second quarter of 2023, the company had over 45 million active fintech users and processed over $42 billion in total payment volume. That volume was a 39% increase from the same quarter of 2022.
On the logistics side of the business, MercadoLibre is setting records. In the second quarter, 111 million shipments were delivered either on the same day or the next day. And nearly 80% of orders arrived to consumers in two days or less.
Having gone a long way to solving these two problems, MercadoLibre's e-commerce marketplace is now undeniably thriving. Its Q2 gross merchandise volume (the dollar value of marketplace transactions) surpassed $10 billion. For perspective, it was only at $3.1 billion in the same quarter five years ago.
With all of these things going right, it's no wonder MercadoLibre's revenue is up more than 700% in the past five years.
MELI Revenue (TTM) data by YCharts
Three things to watch
Despite its strong past growth, MercadoLibre's future growth opportunities are still promising. For example, e-commerce in South America is expected to grow at a double-digit annual pace through 2027, according to Statista Market Insights. Moreover, digital advertising (a budding MercadoLibre business) and fintech are also expected to keep growing, giving the company more upside.
That said, here are three things to keep an eye on with MercadoLibre.
1. There are international risks related to currency exchange rates
Believe it or not, MercadoLibre's top line is growing even faster than it appears, at least in local currency. Unfortunately, certain foreign currencies have depreciated relative to the U.S. dollar. For example, Q2 total payment volume was only up 39% year over year for MercadoLibre, as mentioned. But adjusting for currency fluctuations, it was up 97% year over year.
The stability of international economies is one of the biggest concerns investors have when it comes to MercadoLibre stock.
2. Crucial investments created a short-term hit on profit margins
Investing in fintech and logistics was absolutely crucial for MercadoLibre. That said, the company's gross profit margin and net profit margin have gone down as these parts of the business have grown.
MELI Gross Profit Margin data by YCharts
The good news is that these two metrics have perked up lately for MercadoLibre. If this recent trend continues, it would support more upside for the stock.
3. Competition
With any growth market, there's bound to be competition and the same is true for MercadoLibre. And most U.S. investors don't really have a good picture of the competitive landscape in Latin America.
To help narrow it down, consider that over half of MercadoLibre's net revenue came from Brazil in 2022. And while commerce accounted for 55% of net revenue compared to just 45% for fintech, revenue from fintech is growing much faster, nearly doubling in 2022.
Therefore, comparing MercadoLibre's future financial results to those of Brazilian fintech players like Nu Holdings or StoneCo may be helpful in determining how well the company competes.
Adding it all up
MercadoLibre stock trades at a price-to-sales ratio of 5.2, well below its 10-year average of 11. In short, the stock trades much cheaper than it normally does. That's good for investors wanting to buy shares today.
I think MercadoLibre's ongoing opportunity is still strong. And with its profit margin currently trending upward, the business appears to be getting better as well. Therefore, I believe MercadoLibre stock has all the makings of a market-beating investment today.
