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This E-Commerce Stock Offers Massive Upside Potential

By Andrés Cardenal - Jan 5, 2016 at 8:54AM

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Buying MercadoLibre today could be like buying Amazon or eBay a decade ago.

MercadoLibre (MELI -2.81%) means "free market" in Spanish, and the company is the undisputed e-commerce king in Latin America. The region is going through significant economic turmoil lately, but MercadoLibre is showing extraordinary strength by delivering rock-solid growth rates under challenging economic conditions. Even better, the stock offers massive room for gains in the years ahead.

Hola, MercadoLibre
MercadoLibre has 138.4 million registered users as of the third quarter of 2015, representing a big increase of 20% over the same quarter in 2014. The company is the market leader in all of its main markets, and it has a ubiquitous presence across different countries in Latin America. According to management, nearly 28% of all Internet users in Latin America access MercadoLibre on a monthly basis.

In addition to its marketplace business, the company is rapidly expanding into areas such as digital payments, financing, advertising, logistics, and back-end e-commerce solutions. These different business areas don't only represent additional growth venues for MercadoLibre -- they also provide a superior experience to both buyers and sellers of all kinds of products, and they strengthen MercadoLibre's position in the industry by building an integrated platform of complimentary services.



Profit margins are under pressure due to currency headwinds and increased investments for growth; however, the business model remains remarkably profitable, as MercadoLibre produced an operating margin in the neighborhood of 26% of revenue last quarter. This provides plenty of financial resources for MercadoLibre to continue investing in all kinds of initiatives while still delivering solid profitability to investors.

Doing great in a tough environment
Big markets like Brazil, Argentina, and Venezuela are going through tough economic times lately. However, MercadoLibre continues doing remarkably well in spite of economic stagnation and currency depreciation in these countries.

Total sales during the third quarter grew 14% year over year, reaching $168.6 million. The sales increase in constant currency was a much stronger 68%, though. MercadoLibre's financial numbers can be quite volatile due to exchange rate fluctuations, but the key operational metrics confirm that the business is firing on all cylinders. 

The amount of items sold in the platform reached 34 million last quarter, a vigorous annual increase of 26%. Total payments transactions were 22 million, growing 75.2% from the third quarter in 2014. Digital payments via the company's MercadoPago platform accounted for 58% of gross merchandise value during the quarter, so customers are increasingly relying on MercadoLibre for both e-commerce and digital payments solutions. 

Nearly 60% of units sold in Brazil and 45% of all items sold Brazil, Argentina, Mexico, and Columbia were shipped via the company's MercadoEnvios shipping platform. This is a powerful strategy to ensure that all customers receive their products on time, and it also keeps buyers and sellers deeply entrenched in MercadoLibre's ecosystem.

Massive opportunity
MercadoLibre has a market capitalization value around $5 billion, while big e-commerce players in the U.S. such as eBay (EBAY 0.82%) and Amazon (AMZN -1.13%) are worth $33 billion and $317 billion, respectively. This means MercadoLibre is currently worth nearly 15% the size of eBay and a minuscule 1.6% the size of Amazon in terms of market value.  

In terms of revenue, Wall Street analysts are projecting $638.6 million in sales for MercadoLibre in 2015 versus $8.6 billion for eBay and $107.3 billion for Amazon in the same year. MercadoLibre clearly has enormous room for expansion before the company reaches even a fraction of the sales companies like eBay and Amazon are currently making.

Total population in Latin America is estimated to be around 627 million people, significantly larger than the U.S. population of 323 million. Income levels are much lower in Latin America, but e-commerce still represents only 2.1% of retail transactions versus 7.4% of all retail sales happening online in the U.S. 

The main point is quite clear: The e-commerce industry in Latin America offers enormous opportunities for growth in the long term and MercadoLibre is the unchallenged leader in this remarkably promising sector. The company has the competitive strength to capitalize on these opportunities, and management has proven its ability to successfully sail through turbulent waters. For this reason, MercadoLibre stock looks like an extraordinary growth opportunity for investors. 

Andrés Cardenal owns shares of and MercadoLibre. The Motley Fool owns shares of and recommends, eBay, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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