Why Shares of MercadoLibre Sank In February

Shares of MercadoLibre (NASDAQ: MELI) fell 18.2% in March, according to data from S&P Global Market Intelligence. The e-commerce and financial technology giant in Latin America keeps posting strong growth, but investors are fearful over declining profit margins and intense competition. MercadoLibre stock is now down 32% from all-time highs, one of its worst in recent years.

Here's why MercadoLibre stock fell last month, and whether it is a buy for your portfolio today.

Fast growth, margin compression

Growth continues to impress at MeracdoLibre. Spending through its e-commerce platform grew 35% year-over-year last quarter across its three largest countries -- Mexico, Brazil, and Argentina -- and also showed impressive growth in smaller Latin American markets. On a constant currency basis, commerce revenue grew 37% year-over-year, while financial technology grew an astounding 61% year-over-year.

This makes MercadoLibre one of the fastest-growing businesses in the world, and the largest commerce player in Latin America. So why is the stock falling? Investors are concerned that management is pushing prices lower across shipping, inventory, and its credit portfolio, thereby compressing MercadoLibre's operating margin.

Over the last 12 months, MercadoLibre's operating margin was 11%, down from a peak of 16% in 2023. This is a misunderstanding of MercadoLibre's operations. It wants to drive down costs and deliver to customers quickly, similar to Amazon. However, margins should return to higher levels over the long term with greater scale, growth in advertising, and the higher margins coming from its financial technology business.

Image source: Getty Images.

Time to buy MercadoLibre stock?

After this drawdown, MercadoLibre stock now trades at a price-to-earnings ratio (P/E) of 45. While this is expensive relative to the broader market, investors may still be underestimating MercadoLibre's long-term profit potential if it keeps up this impressive growth in the years ahead.

E-commerce penetration in Latin America is well behind the United States. As more of these economies develop, more money will be spent on e-commerce (and digital payments), which should drive stronger growth in the MercadoLibre marketplace. Revenue should keep growing at a healthy double-digit rate, and I think it is entirely plausible that its trailing revenue of $29 billion can double to $60 billion within a few years.

If profit margins return to 15%, that is $9 billion in earnings power a few years down the road. Right now, MercadoLibre has a market cap of $90 billion, or just 10x this earnings potential. That should make the stock a buy for investors right now if you can stomach the potential volatility over the next few years.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.