The Ultimate Growth Stock to Buy With $1,000 Right Now

Key Points

• MercadoLibre operates in a region that's underpenetrated in e-commerce, and its value proposition is attracting many new customers.

• It has a huge opportunity in fintech as underbanked users benefit from its digital platform.

• MercadoLibre stock looks like a good value at the current price.

• 10 stocks we like better than MercadoLibre ›

In a strong bull market, investors benefit from great growth stocks that lead the charge. However, these days, the value of the S&P 500 (SNPINDEX: ^GSPC) largely falls into a handful of stocks that have become so big that, to some degree, they dictate what's referred to as "the market."

That could mean many different things. One of them is that there are some great, smaller stocks out there that are growing much faster than the S&P 500, and investors won't really notice them because they are subsumed by a market, or several large stocks, that are so much bigger. You need to hunt a bit to find them, but it's worth it.

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MercadoLibre (NASDAQ: MELI) is one such stock. It will never show up on the S&P 500 because it's not a U.S. stock. It's much smaller than the "Magnificent Seven" stocks and most of the largest stocks on the market, with $119 billion in market cap. But it's growing quickly and crushing the market, and it's the ultimate growth stock.

Image source: Getty Images.

Underpenetrated in e-commerce

MercadoLibre's core business is e-commerce. It operates an Amazon-like marketplace in 18 Latin American markets, a region that's still underpenetrated in e-commerce compared with other global markets. It's about 14% penetrated, in contrast with 26% in the U.S. and 31% in China, giving it a long growth runway.

Management is focused on creating a value proposition that will lead more customers to try online shopping. Some recent actions include lowering its free shipping threshold in Brazil from R$70 (Brazilian real) to R$19, and lowering the cost of shipping for sellers, making it easier to pass along the savings to customers. It also has a compelling membership program that includes access to Disney+, cash-back options, a Meli shipping day with free shipping, and other perks.

These methods are working, and it's bringing in new customers at high rates. Active customers increased 25% year over year in the second quarter, and gross merchandise volume was up 37% over last year (currency neutral). Items sold increased 31%. Items sold per unique buyer were up 5%, an impressive display when you consider how many new buyers there were.

Purchase frequency and customers buying in three or more categories have both been rising. That's attracting more sellers and leading to a more compelling value proposition, creating a powerful, self-reinforcing network effect.

Making strides in fintech

MercadoLibre started a digital wallet business for underbanked customers to be able to participate on its e-commerce platform, and it has expanded the original MercadoPago digital payments app into a full financial services app, with bank accounts and credit products.

MercadoLibre is the top fintech company in amount of monthly active users (MAU) in three of its four top markets, and second in Brazil, home of NuBank. It has an edge in fintech because it offers a platform that's part of a larger ecosystem where users are already engaged, leading to higher usage and lower churn. The wide ecosystem also provides it with rich data that it uses to make well-informed credit decisions and lower credit risk. It has nearly $14 billion in assets under management as of the end of the second quarter, a 109% increase over last year, and the total credit portfolio was up 91%.

Since as a region, MercadoLibre's markets are underbanked, this is also a huge growth opportunity. For example, finance in Brazil has historically been dominated by a handful of large, legacy banks with a high barrier to entry, making it challenging for less affluent mass consumers to get a bank account and leaving them without access to financial engagement. But that's being disrupted, and these banks' share of total payment value has been decreasing, while challenger banks' share has been increasing. There's still a ways to go, and challenger banks like MercadoLibre have an edge, as they offer greater financial access to more people.

Profitable and cheap

MercadoLibre is a growth stock, but it's also highly profitable, which lowers risk. Operating income increased 14% year over year in the second quarter with a 12% margin, and the company produced $454 million in adjusted free cash flow.

Finally, MercadoLibre stock trades at a reasonable valuation, which is important in a great growth stock, because it leaves room for expansion and error. It trades at a forward, one-year P/E ratio of 35 and a price-to-free cash flow ratio of 20, which is attractive for a company growing as quickly as MercadoLibre.

MercadoLibre stock is trouncing the market this year, up 38% versus the S&P 500's total 12% gain, and investors should expect that to continue for the foreseeable future.

Should you invest $1,000 in MercadoLibre right now?

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Jennifer Saibil has positions in MercadoLibre and Nu Holdings. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Walt Disney. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.