Has MELI Stock Been Good for Investors?

Latin America's MercadoLibre (NASDAQ: MELI) -- an e-commerce, logistics, and financial technology (fintech) business -- has been quite good for investors over this past decade. In fact, it's the 35th best stock over the last 10 years (among stocks that are valued at $5 billion or more), according to MacroTrends, achieving 32% annualized returns.

It's not just over the past decade. Indeed, MercadoLibre stock is up over 100% in just the last three years, well ahead of the 64% gain for the S&P 500.

That said, the stock is actually down over the past year. Are the good times for MercadoLibre's shareholders over?

Image source: Getty Images.

Looking at the performance of MercadoLibre stock over the last three- and 10-year periods is an excellent case study of what creates value on the stock market. And looking at its performance over the past year is a good example of what influences stock prices over shorter time periods.

Long-term value creation

Studies show that the best stock performers over 10 years are consistently some of the best growth companies. It makes sense: If a business becomes significantly bigger, it usually becomes significantly more valuable. That's certainly been true of MercadoLibre. Its revenue is up nearly 4,000% over the past decade.

However, studies also show that growth isn't the only factor when it comes to the long-term creation of shareholder value. Profits -- specifically, profit margins -- matter too. After all, what's the point of generating more revenue but having less to show for it at the end of the day?

In this case, MercadoLibre has grown both revenue and profits, which is why it's done so well. The chart shows that the company's operating margin dipped several years ago as it ramped up investments in its logistics business. But margins are more recently bouncing back as its revenue soars.

Data by YCharts

Short-term opportunities arise

To reiterate, MercadoLibre stock has done quite well for investors over the long term because profitable growth routinely creates shareholder value. But MercadoLibre's stock is down over the past year. This is because a stock's price is less correlated with its business fundamentals when time horizons shrink. A stock can dramatically rise or despairingly fall in a single year as investor sentiment swings.

MercadoLibre's investors need to determine whether it can profitably grow over the long term from here, and by how much. This is what will drive shareholder returns.

MercadoLibre is still growing its revenue at a nearly 40% rate as of the most recent quarter, pointing toward ongoing strength in the business. Its trailing-12-month revenue of $26 billion remains small in comparison to the size of its addressable market opportunity in Latin America. And it continues to grow at this fast pace while also maintaining profit margins of around 10%.

Simply put, MercadoLibre appears capable of delivering profitable growth for many years yet. This could drive stronger stock returns and make its underperformance over the last year look like a mere blip on the long-term radar.

Jon Quast has positions in MercadoLibre. The Motley Fool has positions in and recommends MercadoLibre. The Motley Fool has a disclosure policy.