MercadoLibre's Growth Is Accelerating, but the Stock Is Down 38%: What Is the Market Missing?
Key Points
Its profit margin is down as it accelerates investments in its infrastructure and customer acquisition.
But its long-term growth trajectory remains intact, with fantastic revenue growth last quarter.
Shares of the stock look cheap after falling 38% as long as you plan to hold for many years.
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Despite this retail giant's accelerating revenue growth, the market is not happy with MercadoLibre (NASDAQ: MELI) right now. The e-commerce and financial technology (fintech) player spanning Latin America has seen accelerating revenue growth in recent quarters but at the expense of its bottom-line profit margins.
Shares are down some 38% from all-time highs, driven by nervousness about investments in credit card and rapid-delivery infrastructure. While Wall Street is worried about next quarter's profits, it is missing the ecosystem that MercadoLibre is building in Mexico, Brazil, and other markets.
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Here's why MercadoLibre stock could be a fantastic contrarian pick amid the artificial intelligence (AI) bull market.
Sacrificing short-term profits
The dual engines of fintech and e-commerce have driven MercadoLibre to become one of the largest businesses in Latin America. There are 83 million monthly active users (MAUs) of its fintech services, up 30% year over year, and 84 million active buyers on MercadoLibre, up 25.4% year over year. This led to 39% revenue growth in constant currency in both Mexico and Brazil last quarter, MercadoLibre's two largest markets by revenue.
Where Wall Street is pessimistic is how MercadoLibre is delivering exceptional revenue growth. Management has pushed the accelerator to the floor with aggressive reinvestments in delivery infrastructure and fintech credit card acquisitions. These are leading to short-term margin compression due to fixed e-commerce warehouse costs and accounting rules for credit card customers, but they have accelerated revenue growth and should lead to long-term advantages vs. the competition. Margins will recover once customer spending catches up with all these upfront investments.
Image source: Getty Images.
New levers for monetization
MercadoLibre's EBIT margin (earnings before interest and taxes) has fallen to 9.6% over the last 12 months, compared to 15% at the post-pandemic peak. The EBIT margin may continue to slide in the interim.
But over the next five years, there are clear reasons why the core business will see a recovery in profit margins, including more scale in e-commerce and more mature credit card customers spending with MercadoPago credit cards. There are other layers of monetization for MercadoLibre that could eventually push margins above its 15% level in 2024. These include scaling up advertising solutions and fintech solutions for merchants, such as payment terminals.
What's more, retail advertising offers extremely high margins, and management says advertising revenue is growing faster than the overall business today. Payment volume through terminals for in-person shopping comes with high margins and is growing 41% year over year in constant currency. In the long run, these businesses with attractive unit economics should give MercadoLibre significant operating leverage.
MELI Revenue (TTM) data by YCharts.
Why MeracdoLibre stock is cheap today
After this sharp drawdown, MercadoLibre shares now trade at a market cap of $81.5 billion. Despite major capital expenditure (capex) plans and investments in its fintech business, MercadoLibre is still generating positive net income of $1.9 billion, giving it the flexibility to fund its expansion on its own balance sheet without raising capital from outside sources.
Revenue was $31.8 billion over the last 12 months. It is not a monopoly, but there is a massive opportunity for its two business segments across Latin America, far larger than its current revenue. The region is a decade or more behind the United States in some cases when it comes to digital payments and e-commerce adoption, which is great news for MercadoLibre, a leader in both fields.
Last quarter, MercadoLibre's revenue grew 46% year over year. Even if revenue growth slows to 20% on average over the next five years, MercadoLibre's sales will reach $79 billion five years from now. On these sales, we should expect profit margins to return to 15%, if not improve from here, equating to at least $11.86 billion in earnings five years in the future.
That is just 7x the current market cap of $81.5 billion, making MercadoLibre stock cheap for investors looking to hold for the long haul.
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Brett Schafer has positions in MercadoLibre. The Motley Fool has positions in and recommends MercadoLibre. The Motley Fool has a disclosure policy.
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