MercadoLibre Stock Down 36% -- Strong Revenue Growth Makes It a Buy

MercadoLibre (NASDAQ: MELI) posted its first-quarter results on May 7, and the market had a negative reaction to the report despite sales and earnings beats in the period. The business recorded earnings per share of $8.23 on sales of $8.58 billion. For comparison, the average analyst estimate had called for earnings per share of $8.20 and revenue of $8.32 billion.

Even though the company's earnings beat the average analyst target, performance still came in below some higher-end estimates. MercadoLibre has been prioritizing sales expansion recently, and it's coming at a cost for margins.

Making matters worse in the eyes of some investors, management looks poised to continue that course for the foreseeable future. But while earnings are currently being tamped down by spending on growth projects, MercadoLibre is posting impressive overall results.

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The market isn't giving MercadoLibre enough credit

MercadoLibre stock saw a significant sell-off following its Q1 report. With net income of $417 million, the business recorded a net-income margin of 4.7% in the period. Meanwhile, operating income came in at $611 million -- representing a margin of 6.9%.

For comparison, the business posted a net-income margin of 6.4% and an operating income margin of 10.1% in last year's fourth quarter. MercadoLibre saw meaningful margin deterioration on a sequential basis, and investors punished the stock following the company's Q1 report.

Net income was down 16% year over year in Q1, and the business posted an adjusted free cash flow loss of $56 million in the period. On the other hand, the business posted robust sales growth in the period.

• MercadoLibre's revenue surged 49% year over year in the first quarter.
• Total payment volume across the company's platforms came in at $87.2 billion. Performance in the category was up 50% year over year and 55% on a currency-adjusted basis.
• MercadoLibre's e-commerce division saw merchandise volume of $19 billion in the period -- up 42% year over year and a 36% on a currency-adjusted basis.

MercadoLibre is seeing margins pressured by higher investments and the expansion of its credit portfolio. The case could be made that the company's blistering sales growth shouldn't take center stage in an evaluation of the stock if substantial margin declines are leaning to lower overall earnings and free cash flow, but there are good reasons to believe that MercadoLibre is laying the foundation that will strengthen the long-term growth story.

MercadoLibre looks attractively valued

Even after a moderate post-earnings valuation bounce, the Latin American e-commerce leader's stock is down roughly 17% across 2026's trading. Even more striking, the company's share price is down roughly 34% over the last year.

The company now has a market capitalization of roughly $84.4 billion and is valued at approximately 40 times this year's expected earnings and 2.1 times expected sales. In the context of the company's rapid sales growth, the company's forward price-to-sales multiple looks low.

While e-commerce remains a relatively low-margin business and MercadoLibre has actually seen margins contract recently, the company has strong operational fundamentals. Even with declines for the company's earnings outlook, the substantial pullback for the company's valuation suggests that shares are still trading at levels that leave room for big upside over the long term.

While the company's forward P/E multiple of 40 may not look cheap in the context of last quarter's double-digit decline for net income, management appears to be making smart long-term growth bets -- and strong sales expansion today could pave the way for massive earnings growth further down the line when there's more room to trim expenses.

Betting more heavily on the credit market comes with some added risks, and it's presenting a drag on earnings at the moment. On the other hand, the credit services play opens the door for MercadoLibre to be a dominant player that can synergistically capitalize on rapid expansion for Latin America's e-commerce and fintech markets. Alongside its credit push, the company has continued to invest heavily in artificial intelligence.

MercadoLibre has signaled that it will continue with its heavy investment push, and it's reasonable to expect that the company's earnings will face some pressures even as the business delivers huge sales growth. On the other hand, MercadoLibre's strategic initiatives look well-founded -- and long-term shareholders could be rewarded for their patience as the company builds on its strengths.

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