Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons I Bought MercadoLibre Stock

By Andrés Cardenal - Sep 14, 2015 at 12:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

MercadoLibre stock is down 30% from recent highs. Here is why I'm capitalizing on the opportunity to buy a powerful growth company at cheap prices.

MercadoLibre (MELI 5.97%) is the leading e-commerce player in Latin America, a business offering tremendous opportunities for growth over the long term. However, many of the company's main markets are going through significant weakness due to economic turmoil in the region, and this is generating fear among investors in MercadoLibre stock.

Capitalizing on the opportunity to buy a promising growth stock at opportunistic prices, I recently bought MercadoLibre for my personal portfolio. Here are the main reason behind my decision.

A top-quality growth business
MercadoLibre means "free market" in Spanish, and the company is the undisputed e-commerce facilitator in Latin America. MercadoLibre comes second to none in its key markets, and this represents a huge strategic advantage in an industry in which size is crucial and the network effect is a major success factor.

Source: MercadoLibre.

Consumers want to go to the e-commerce platform where they can get more products at lower prices, and sellers are naturally attracted to a big and growing pool of potential customers. The bigger and the more active the platform, the more valuable MercadoLibre becomes to both buyers and sellers.

MercadoLibre had over 132 million registered users as of the second quarter of 2015, and management calculates that nearly 28% of all Internet users in Latin America access MercadoLibre on a monthly basis. This kind of presence and brand recognition make MercadoLibre quite a unique player in its industry.

In addition, MercadoLibre is consolidating its portfolio of services to continue adding value to customers. MercadoPago is a digital payments system that works not only inside the platform, but also on a stand-alone basis for all kinds of products and services. The company is also building its MercadoEnvios shipping platform, facilitating operations and providing a more reliable experience to buyers. MercadoLibre also offers advertising services for sellers to achieve better brand recognition and sustained growth over time.

E-commerce currently represents only 2.1% of retail transactions in Latin America, while 7.4% of retail purchases in the U.S. are being done online. This speaks wonders about MercadoLibre's potential for expansion as the market leader in a promising growth industry.

Rock-solid fundamental performance
Countries such as Brazil, Argentina, and Venezuela are going through volatile economic times; their currencies are depreciating, and economic growth remains subdued. This is hurting MercadoLibre's financial figures when translated into U.S. dollars, however, the business keeps firing on all cylinders in spite of economic headwinds.

Total sales during the second quarter amounted to $154.3 million, year-over-year growth of 17% in U.S. dollars, and 88.3% in local currencies. Excluding Venezuela, revenues grew 28.9% in U.S. dollars and 61.1% in local currencies. Profits are taking a big hit due to currency fluctuations and increased investments for growth, but MercadoLibre still retained 22.4% of sales as operating earnings.

The amount of items sold in the platform grew 27.8%, reaching 30.2 million units last quarter. Total payment transactions via MercadoPago accelerated for the seventh consecutive quarter to a record 18.1 million, which represents an increase of 75.8% from the second quarter in 2014.

MercadoEnvios seems to be gaining steam at a considerable speed: By the end of the quarter, over 40% of all items sold in Brazil, Argentina, Mexico, and Colombia were delivered through MercadoEnvios' shipping partners.

Buying in times of opportunity
MercadoLibre stock is down by more than 30% from its highs of the last year. The stock is trading at a forward P/E ratio around 33 times earnings forecasts for the coming year -- clearly a premium versus the overall market, but still a fairly reasonable valuation for a company with many long years of powerful growth ahead of it.

Economic conditions come and go, and while it's hard to tell how the main economic variables in Latin America will evolve over the middle term, everything indicates that MercadoLibre is strong enough to continue delivering solid performance in a challenging environment.

For this reason, I'm planning to hold on to my MercadoLibre shares for years to come, and I may even add to the position over time, especially if the valuation continues declining.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
MELI
$834.88 (5.97%) $47.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
338%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.