Missed the AI Rally? 3 Reasons to Watch MercadoLibre Closely Following Its Recent Pullback.
Key Points
MercadoLibre has a huge growth runway ahead.
Its profit margins are sinking now, but this is only temporary.
Advertising revenue growth will give the business another boost.
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Here are three reasons to watch e-commerce giant MercadoLibre (NASDAQ: MELI) closely after its recent pullback.
Image source: Getty Images.
1. A massive growth opportunity
MercadoLibre is one of the leading financial technology (fintech) players in Latin America, and the dominant e-commerce platform. Its e-commerce business is similar to Amazon (NASDAQ: AMZN), where it drives customer loyalty with a wide selection of products and consistently improving delivery speeds.
While Amazon is a more mature business today, MercadoLibre and the Latin American regions it operates in are still in the early stages of e-commerce adoption. MercadoLibre's total revenue over the last 12 months was $31.8 billion, including fintech revenue. Amazon's North American retail operations generated $437.5 billion in revenue over the same time period. The economy for the whole of Latin America is not as large as that in the United States, but this illustrates MercadoLibre's size relative to Amazon.
While Amazon also dominates its e-commerce landscape, what it doesn't have is one of the largest financial technology businesses around. MercadoLibre has 83 million active fintech users, with fintech revenue growing 54% year over year last quarter and reaching $14 billion over the last 12 months.
As with e-commerce, adoption of digital financial tools by both individuals and businesses lags adoption in the United States, giving MercadoLibre dual runways to grow over the next decade.
2. Recovering profit margins
Looking at the headline figures, MercadoLibre stock doesn't look particularly cheap. It has a price-to-earnings (P/E) ratio of 42, which is above the average for the S&P 500 index.
You may want to look more closely at MercadoLibre's temporary margin compression. Management has decided to accelerate capital investments in new warehouses and delivery networks across the countries it serves in order to improve delivery speeds to customers, leading to increased spending on its e-commerce platform. This will hurt profit margins in the short term but lead to operating leverage over the long run.
A similar thing is happening in fintech, with the push to get customers to use the Mercado Pago credit card. When adding a credit card customer, businesses are required by accounting standards to recognize estimated losses at the beginning of the customer journey; that temporarily hurts margins for a company that's growing quickly, even if it means long-term margin expansion. MercadoLibre has been adding record numbers of credit card users in recent quarters.
EBIT (earnings before interest and taxes) margin has fallen to 9.6%, and may fall further from here, but it was above 15% just a few years ago. As the company increases in scale, it's reasonable to think that margins can recover or surpass this previous high:
MELI EBIT Margin (TTM) data by YCharts.
3. Fast-growing advertising revenue
An underrated part of MercadoLibre's future is advertising. There it's again running a playbook similar to Amazon's, with retail-sponsored listings and video ads across its streaming video bundle (though it works with other streaming video providers, rather than investing in original content like Amazon).
Advertising revenue grew 63% in constant currency last quarter; it should continue to grow quickly as MercadoLibre's business scales up and the overall advertising market in Latin America moves online. Advertising revenue comes with extremely high margins, which should be another rising tide that lifts MercadoLibre's profits in the years ahead.
With the stock down 38.5% from its highs, you might consider MercadoLibre if you're tired of the AI bull market.
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Brett Schafer has positions in MercadoLibre. The Motley Fool has positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.
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