Down 40%, Is It Time To Buy MercadoLibre?

MercadoLibre (NASDAQ: MELI) has been a top stock throughout its history as it's built Latin America's largest e-commerce and digital payments business.

However, more recently, the company has come under pressure. The stock has fallen as it has faced intensifying competitive pressure from Amazon and Sea Limited's Shopee, and at the same time, its profit margins are falling as it spends on infrastructure. That includes the expansion of its logistics network and credit business in part to fend off that competition. That also includes lowering the free shipping threshold in Brazil, its core market.

So is the sell-off justified, or is MercadoLibre just in the middle of an investment cycle that will pay off? Let's take a look at where MercadoLibre stands after its latest report.

Image source: MercadoLibre.

MercadoLibre's Q1

While MercadoLibre's declining profit has been a problem for the stock, the company continues to grow revenue at a strong pace, jumping by 46% on a currency-neutral basis in the first quarter. Its 49% reported growth was its fastest growth rate in nearly four years.

Management touted its "once-in-a-generation opportunity to transform how hundreds of millions of Latin Americans shop, pay, and access financial services," seemingly as an argument for increasing its investment, as it still sees a large growth opportunity in Latin America.

The company is also seeing benefits from lowering the free shipping threshold in Brazil, where gross merchandise volume (GMV) improved to 38%.

MercadoLibre's revenue reached $8.85 billion in the quarter, ahead of estimates at $8.3 billion. However, its operating margin fell sharply, down by six percentage points to 6.9%, which management explained as a choice to "prioritize long-term investments over short-term profitability." Over half of that was from the increase in its provisions for doubtful accounts due to the 87% growth in its credit portfolio. Operating income fell 20% to $611 million, and its earnings per share declined from $9.74 to $8.23, below the consensus at $9.37.

Is competition hurting MercadoLibre?

The biggest question facing MercadoLibre and its investors is whether competition is hurting MercadoLibre.

It's not unusual for e-commerce companies to go through investment cycles that weigh on margins. Amazon and Shopify have done this in the past, as has MercadoLibre, and they've come out on the other side every time.

MercadoLibre has gotten more aggressive to keep merchants on its platform. For example, it's lowered take rates in some categories to get merchants to maintain competitive pricing. It also acknowledged that Brazil, where half of its revenue comes from, is getting more competitive, but that the company has risen to the challenge, and its metrics show that. Management also said that new competitors are helping to drive overall growth in the online channel, adding, "The pie is increasing faster than before, and we are taking an even larger slice."

Is MercadoLibre a buy?

At this point, MercadoLibre may be feeling some impact from competition, but if it were significant, it wouldn't be able to grow its revenue of 46% year-over-year, executing across all of its businesses.

MercadoLibre doesn't provide guidance, so investors don't have insight into what management expects for the rest of the year. However, management did say the lower take rates would hit profits in Q2, so we could see margins remain weak.

At the current price, MercadoLibre's risks seem more than fully priced in. The stock is now trading below where it peaked during the pandemic, though its revenue is several times larger.

It's now trading at a price-to-earnings ratio of around 40 based on generally accepted accounting principles (GAAP), which is a great price to pay for a company growing as fast as MercadoLibre with its set of competitive advantages.

Unless its profits are permanently challenged, which seems unlikely, the stock looks like an easy winner from here.

Jeremy Bowman has positions in Amazon, MercadoLibre, and Shopify. The Motley Fool has positions in and recommends Amazon, MercadoLibre, Sea Limited, and Shopify. The Motley Fool has a disclosure policy.