The Latin American economy stumbled in 2023, but World Bank economists expect growth to accelerate in 2024 and 2025 as inflation moderates and interest rates fall. That should be a catalyst to business and consumer spending across the region, and few companies are better positioned to benefit than MercadoLibre (MELI 3.09%).
Another favorable tailwind is also taking shape. The S&P 500 recently hit a new record high, confirming the new bull market. The index returned an average of 169% during the last dozen bull markets, and many stocks will move higher during the new one. That could certainly be a tailwind for MercadoLibre.
MercadoLibre is the largest e-commerce company in Latin America
MercadoLibre runs the largest online commerce and fintech ecosystem in Latin America. Its marketplace is the most visited digital shopping destination in the region, and the market leader in terms of revenue. Additionally, its complementary payments business Mercado Pago is the sixth-largest but fastest-growing acquirer, according to management.
That scale is an important competitive advantage for two reasons. First, it creates a powerful network effect that makes the marketplace more attractive to merchants and customers as the ecosystem expands. Second, it gives MercadoLibre a data advantage. The company processes millions of transactions daily, and each one improves its ability to prevent fraud and provide financial services like merchant loans and consumer credit products.
Building on that, MercadoLibre can also engage customers and source shopper data unlike any other Latin American retailer, so it has naturally become the largest retail advertiser in the region. In fact, that portion of its business is booming. Advertising revenue grew faster than 70% in the last six quarters, and Insider Intelligence believes MercadoLibre will be the fastest-growing ad tech company in 2024.
MercadoLibre has further cemented its leadership in commerce by investing heavily in logistics capabilities. The company offers shipping and fulfillment services to merchants, and fast and reliable delivery to buyers, making its marketplace more attractive. That value proposition is resonating on both sides. MercadoLibre's logistics network handled a record 94.2% of all shipments in the third quarter, and almost 80% of those shipments were delivered within 48 hours.
In short, MercadoLibre has followed the Amazon (NASDAQ: AMZN) blueprint. It started with a core e-commerce business, then expanded into adjacencies like payments, logistics, and digital advertising. That strategy should continue to pay off for both companies. That said, Amazon is worth about 20 times more than MercadoLibre. Much of that discrepancy is related to Amazon's cloud computing business, something that MercadoLibre (so far) lacks.
MercadoLibre reported strong growth in the third quarter
MercadoLibre looked strong in Q3. Total revenue increased 40% to $3.7 billion, reflecting 45% sales growth in the commerce business and 33% sales growth in the fintech business. Additionally, GAAP net income climbed 178% to $359 million as profit margin expanded nearly five points. That improved profitability was primarily driven by higher interest income (due to higher interest rates) and improved asset quality across its credit portfolio.
Management also provided noteworthy commentary on the earnings call. MercadoLibre recently launched its streaming platform Mercado Play and short-video platform Mercado Clips, both of which create new advertising opportunities. The company also relaunched its Meli+ loyalty program during Q3 with more compelling shipping benefits and access to streaming video content, including Disney+ by Walt Disney.
Not to belabor the point, but those moves are reminiscent of Amazon's Prime Video platform and Prime membership program.
MercadoLibre stock is trading at a reasonable price
Through the end of the decade, retail e-commerce sales are expected to increase at 8% annually, digital payments revenue is expected to increase at 21% annually, and the ad tech market is expected to expand at 14% annually, according to analysts. Those are worldwide forecasts, but investors can assume similar trajectories in Latin America, given that regional economic expansion is expected to align with global economic expansion.
MercadoLibre should grow faster than the market average in all three cases due to its scale and brand authority. Indeed, the Wall Street consensus calls for 24% annual sales growth over the next five years. This forecast makes its current valuation of about 6.4 times sales seem reasonable. That multiple is a discount to the three-year average of 8.8 times sales and a fair price for a company that looks like Amazon did 10 years ago.
Patient investors should feel very comfortable buying this growth stock today. MercadoLibre may not be a $1.6 trillion company like Amazon any time soon, but it could certainly multiply several times in value over the next decade.
