Could This Hot Growth Stock Be the Next MercadoLibre? Why It Looks Like a Screaming Buy

MercadoLibre (NASDAQ:MELI) might not be a household name in the U.S., but in-the-know investors should be familiar with it.

The Latin American e-commerce company has been a juggernaut on the market, up 6,800% since its 2007 IPO. It's delivered breakout growth since then, thanks to a large market opportunity and its expansion into adjacent businesses like digital payments, logistics, and credit.

U.S. investors don't have much exposure to Latin American stocks, but the region represents a massive growth opportunity, and there's another promising growth stock investors should get to know. That's BBB Foods(NYSE:TBBB), the parent of Tiendas 3B, a Mexican chain of discount grocery stores. Its stock has nearly tripled since its 2024 IPO, and it just reported 20% same-store sales growth in the second quarter.

Image source: Tiendas 3B

What is BBB Foods?

Tiendas 3B stands for "Bueno, Bonito y Barato," or "Good, Nice and Affordable."

The company pioneered the hard-discount grocery retail in Mexico, with a private-label strategy and a reputation for high quality and low prices. Its business model is similar to Aldi, the international chain known for private-label products, no frills, and low prices.

BBB Foods opened its first store in 2005 and has since grown to 3,624 stores as of the end of the second quarter. The company sees room in the market to grow to as many as 12,000 stores in Mexico.

Based on that estimate, the company has room to more than triple its store base, and the 20% comparable sales growth in the recent quarter shows that it doesn't need to add stores to grow. Comparable sales growth is especially valuable because they generate higher margins than revenue from new stores.

The hard discount segment also makes up a much smaller market share in Mexico than in other countries. In 2023, the hard discount market share was just 3%, compared to 24% in Germany and 37% in Poland. That's not a guarantee that Mexico will match those countries, but it offers more evidence that BBB Foods has a lot of white space to grow into.

Tiendas 3B has also accelerated its store openings as it's gotten bigger, which bodes well for future growth as well.

Unlike other fast-growing businesses, BBB Foods is also profitable as the company reported 960 million Ps. (Mexican pesos) in earnings before interest, taxes, depreciation, and amortization (EBITDA) on 26 billion Ps, or $1.53 billion in revenue.

Is BBB Foods a buy?

The company's results as a publicly traded company are a clear testament to Tiendas 3B's strength, as 20% same-store sales growth is rare for a retailer.

BBB Foods's closest competitor is Walmart, which dominates the supermarket channel with 32% market share, though the market is highly fragmented after that. However, Tiendas 3B is differentiated from superstores like Walmart because it operates small-footprint stores with a limited assortment of goods, and a focus on high-value-for-money and high-rotation goods. Like Walmart, the company focuses on low-to-middle-income customers.

On an International Financial Reporting Standards (IFRS) basis, the company is still losing money, but BBB Foods' valuation looks reasonable with a price-to-sales ratio of just 1.1, meaning if it maintained that ratio and had a 5% profit margin, its price-to-earnings ratio would be just 22, which looks like a great price for a retailer of its growth potential. That's a hypothetical valuation, but BBB Foods profitability should improve over time, especially if it continues to deliver double-digit same-store sales growth.

Like MercadoLibre before it, Tiendas 3B has the potential to grow for years to come as its business model is clearly resonating with consumers. At a market cap of just $6 billion, the stock could easily deliver multi-bagging returns from here.

Jeremy Bowman has positions in MercadoLibre. The Motley Fool has positions in and recommends BBB Foods, MercadoLibre, and Walmart. The Motley Fool has a disclosure policy.