MercadoLibre (Nasdaq: MELI) is a great company. I've owned the stock in the past and would love to own it again. But at better than $60 per share, it looks wildly overpriced by almost any metric. What am I missing?

My evidence
MercadoLibre operates its online marketplace in 12 Latin American markets: Argentina, Brazil, Colombia, Costa Rica, Chile, Ecuador, Mexico, Panama, Peru, the Dominican Republic, Uruguay, and Venezueula. Here are some relevant statistics about those markets:

Country

Population*

Internet Penetration Rate

Internet Users*

Percentage Below Poverty Line

People Below Poverty Line*

Argentina

39.8

48.9%

19.5

13.9%

5.5

Brazil

192

34%

65.3

26%

49.9

Colombia

44.5

45.3%

20.2

26.8%

11.9

Costa Rica

4.5

34.3%

1.5

23.9%

1.1

Chile

16

50.4%

8.1

15.1%

2.4

Ecuador

13.5

12.1%

1.6

38.3%

5.2

Mexico

106.4

24.8%

26.4

18.2%

19.4

Panama

3.4

27.8%

0.9

28.6%

1.0

Peru

28.8

25.8%

7.4

36.8%

10.6

D.R.

9.8

31.1%

3.0

42.2%

4.1

Uruguay

3.3

38.3%

1.3

13.7%

0.5

Venezuela

26.4

30.9%

8.2

37.9%

10.0

Total

488.4

33.6%

164.3

24.9%

121.6

Sources: OECD, CIA World Factbook, and Cisco Systems.
*In millions.

If you just consider that these markets have a population of nearly 500 million and less than 200 million Internet users, then MercadoLibre looks as if it has a massive growth opportunity on its hands. But once you back out the more than 120 million people in the region living below the poverty line (people who are unlikely to become involved in e-commerce anytime soon), MercadoLibre's addressable market only looks to be a little larger than the United States, with a population that's growing a little more than 1% per year.

Furthermore, MercadoLibre is geographically locked in -- there's no way it's expanding outside Latin America to compete with the likes of eBay (Nasdaq: EBAY), which actually owns a stake in MercadoLibre, or Amazon.com (Nasdaq: AMZN). In addition, we should expect every incremental MercadoLibre user to be poorer and therefore less likely to spend large sums of money online. All in all, the company's next few years should be far less exciting than its last few.

The relevant numbers
Assume, for example, that there are 350 million Internet users in MercadoLibre's markets 10 years from now. That would mean almost 100% penetration of the population living above the poverty line -- an optimistic assumption, to say the least. Now assume that 50% visit Mercadolibre's site regularly, that 25% of those are sellers and 75% are buyers -- average assumptions for this space -- and that the average buyer purchases three items per year at an average cost of $50 each (about where a mature eBay is today). Here's what MercadoLibre's numbers would look like in that scenario:

Metric

2009

2019

Annualized Growth

Unique buyers

9.1

118.4

29%

Items sold

29.5

355.1

28%

Gross merchandise volume

$2,751

$19,825

22%

Marketplace revenue

$128.2

$991.2

23%

Source: Motley Fool Global Gains estimates.

Apply a normalized 36% operating margin to that revenue base, and discount the resulting free cash flow back at a 14% rate (appropriate for a region as volatile as Latin America), and you get a value of just $25 per share -- less than half of the current stock price.

But what about the company's nascent and fast-growing payments business, you ask? Let's take a look at some assumptions:

Metric

2009

2019

Annualized Growth

Payments as a percentage of transactions

10.5%

75%

N/A

Total payments

3.1

266.3

56%

Payments volume

$382.5

$14,273

44%

Payments revenue

$44.6

$1,427

41%

Source: Motley Fool Global Gains estimates.

Applying the same margin and discount rate as before, this part of the business is worth $33 per share. Add the two numbers together, and under some very optimistic assumptions (again, check out those annualized growth rates), MercadoLibre is worth $58 per share -- a little less than today's stock price. In other words, if you buy MercadoLibre to beat the market, you're hoping the company can achieve better than 30% revenue growth annually over the next 10 years. To my eye, that means betting people living below the poverty line today become active Internet consumers, or that MercadoLibre is able to expand outside of the Latin American market. Neither scenario seems probable.

Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. MercadoLibre is a Motley Fool Rule Breakers selection. Amazon.com and eBay are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on eBay. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.