Is It Time to Buy Latin America's Top Fintech Stocks at a Discount?

It's been a rough earnings season for the leading fintech stocks of Latin America. MercadoLibre (NASDAQ: MELI), DLocal (NASDAQ: DLO), and Nu Holdings (NYSE: NU) all declined after posting their latest financial results.

Shares of e-commerce and fintech leader MercadoLibre have tumbled 17% in the past six trading days since a disappointing first-quarter performance. DLocal and Nu announced their numbers after Thursday's market close. The stocks slipped 13% and 6% on Friday, respectively.

Zoom out, and the carnage gets worse. Mercado Libre, DLocal, and Nu are trading 42%, 345, and 32% off their recent highs, respectively. There are some serious headwinds picking up for the recent laggards, but this also feels like an opportunity. Let's go over some reasons this could be a great time to establish or build a position in one or more of these Latin American fintech players.

Image source: Getty Images.

1. MercadoLibre

MercadoLibre has seen its market cap shrink from $134 billion to $78 billion since reaching an all-time high a year ago. But that doesn't make it any less of a leader in Latin America's e-commerce and fintech realms. Revenue accelerated in its latest quarter, rising 49%, or 46% on a foreign-exchange neutral basis. No matter which measuring stick you use, that's MercadoLibre's biggest year-over-year jump since the second quarter of 2022.

The market isn't happy with what the 87% jump in its credit portfolio over the past year is doing to MercadoLibre's bottom line. Initiating loans requires establishing bad-debt reserves, squeezing margins in the short run. There's also the fear that if the Latin American bellwether jacks up its lending offerings, through credit cards and other loan products, MercadoLibre stock could come under pressure from credit risk if the Latin American economy takes a turn for the worse.

There's been too much negative attention to the short-term pressure on margins. At least 10 analysts have slashed their price targets on MercadoLibre, including a pair of downgrades. Lost in the noise, MercadoLibre's Mercado Pago processed $87.2 billion in total payment volume through the first three months of this year, a 50% increase from where it was a year ago. The e-commerce business saw its gross merchandise volume rise 42% to $19 billion for the quarter.

Near-term profit forecasts have dropped precipitously in recent months. One can't say that MercadoLibre is cheap at 37 times this year's earnings or even 26 times next year's analyst target. However, free cash flow more than doubled in MercadoLibre's latest quarter. Ramping up its credit offerings elevates the risk level of the shares. Lowering its threshold for free shipping in Brazil is a one-two punch that weighs on margins while raising concerns about MercadoLibre's competitive dominance in e-commerce.

I still like MercadoLibre here. This is a short-term hit for the promise of bigger gains in the future. It's a good investing strategy, and the company has a long track record of bouncing back after near-term setbacks.

2. DLocal

Like MercadoLibre, global payments processing speedster DLocal posted better-than-expected revenue that failed to impress amid challenging margin contraction. The Uruguay-based company saw its revenue rise 55%, fueled largely by a 73% surge in total payment volume.

However, revenue's failure to keep pace with total payment volume, both sequentially and year over year, raised concerns about DLocal's take rate. As a geographically diverse fintech with a penchant for cross-border payments, it unsurprisingly has to offer more generous terms when partnering with larger companies. But investors weren't ready for that. After a long run of double-digit earnings beats, DLocal proved mortal in the first quarter.

DLocal points to secular tailwinds, but the stock's 13% slide on Friday suggests that the headwinds, contracting margins, are stronger. Wall Street pros will probably be narrowing their projections in the coming days, but for now DLocal is trading for less than 13 times forward earnings and just 10 times next year's multiple.

3. Nu Holdings

This brings us to Nu Holdings stock. It's the best performer of the three this earnings season, but the parent company of Brazil's Nubank has still shed nearly a third of its peak value. Despite growing its customer base by 14% to 135 million by the end of March, Nu delivered better-than-expected top-line revenue of $5.3 billion. The 42% jump found it cracking the $5 billion ceiling on the top line for the first time.

Net income rose 41% despite a more modest 27% step up in gross profit. But although Nu still posted the strongest bottom-line growth of the three companies, it still didn't turn in a perfect report. Customer deposits dipped sequentially. The non-performing loan rate increased for customers who were 15 to 90 days late. And it missed slightly on earnings, partly on the early-stage credit provisions that also tripped up MercadoLibre.

Nu remains a cheap fintech relative to its growth. You can buy Nu for just 11 times next year's analyst profit estimate, and less than 15 times this year's outlook. Brazil accounts for 115 million of its 135 million accounts, but with Mexico now reaching 15 million, Nu sees that country at an inflection point to duplicate the growth spurt it achieved in its home country.

Opportunity is knocking for all three companies. You don't need a translator to figure that out.

Rick Munarriz has positions in DLocal, MercadoLibre, and Nu Holdings. The Motley Fool has positions in and recommends MercadoLibre and Nu Holdings. The Motley Fool recommends DLocal and recommends the following options: long January 2027 $7 calls on DLocal and short January 2027 $10 calls on DLocal. The Motley Fool has a disclosure policy.