The 1 E-Commerce Stock That’s Still Growing

The hype surrounding e-commerce stocks during 2020 and 2021 was truly incredible. Businesses involved with selling items online saw massive growth, and consumers were spending much of their newly found financial resources (from stimulus checks and lack of spending on other activities) with various vendors.

Now that life is returning to normal, the stocks are giving back nearly all the gains made during 2020 and 2021. Overall, this makes little sense. Businesses gained customers and established online shopping habits; yet, the stocks behave as if they will lose all their customers.

One stock in particular where this is true is MercadoLibre (MELI -3.23%). The Latin American e-commerce leader has grown by leaps and bounds from 2020 to 2022, but its stock price is nearly flat. Investors need to understand some of the risks, but now could be a once-in-a-lifetime buying opportunity for MercadoLibre.

Person opening a package at home.

Image source: Getty Images.

Fantastic results amid tough comparisons

MercadoLibre has set up many of the tools needed for e-commerce to thrive in Latin America. Among them are the fintech platform Mercado Pago, e-commerce marketplace Mercado Libre, shipping logistics platform Mercado Envios, and consumer credit division Mercado Credito. With such a comprehensive product offering, MercadoLibre has likely captured some portion of Latin American consumer spending in various capacities.

Unlike many fintech companies, the growth that MercadoLibre experienced during the pandemic is still rapid. Overall, MercadoLibre’s revenue grew 67% year over year (YOY) to $2.25 billion in the first quarter. While this marks a deceleration from 74% last quarter and 158% one year ago, that’s still an impressive growth rate.

Breaking down the revenues into e-commerce and fintech shows strength in both divisions, but fintech gets the edge.

Segment YOY Growth Revenue Makeup
Commerce 44% 57%
Fintech 113% 43%

Data source: MercadoLibre.   YOY = year over year

Even though fintech is a smaller portion of MercadoLibre’s business, its rapid growth may allow it to overtake commerce in the future.

The Mercado Libre marketplace experienced difficult comparisons, but its gross merchandise volume (GMV) still rose 32% YOY. Compared to the 115% growth experienced last year, it’s hard to fault MercadoLibre for slowing. Over the past two years, MercadoLibre’s GMV has risen 73% annually. That’s a solid number for any e-commerce company.

Looking at MercadoLibre’s other divisions like Mercado Envios also reveals strength. For example, Mercado Envios handled 91% of products purchased through its marketplace in some capacity, up from 80% a year ago. Additionally, 54% of these packages were delivered the same or the next day.

Person loading packages onto a truck.

Image source: Getty Images.

One way MercadoLibre often gets dinged is its profitability. The company doesn’t usually post a profit as it is focuses on establishing its products. However, the first quarter was an exception with a net income margin of 2.9%. Additionally, MercadoLibre expanded its gross margin from 42.9% last year to 47.7%. While MercadoLibre will have to be consistently profitable to prove bears wrong, the company is on a great trajectory.

Is MercadoLibre a buy?

MercadoLibre’s business is firing on all cylinders with no signs of slowing down. However, if you overpay for a stock, any business results may be offset by a return to standard valuation. For the past five years, MercadoLibre has seldom traded below a price-to-sales (PS) ratio of 10 and never stayed below that valuation for more than a month. The stock is currently trading for about half that level. Investors can purchase the stock for slightly over four times sales.

Chart showing MercadoLibre's price spiking in 2021 and then falling.

MELI PS Ratio data by YCharts

When was the last time MercadoLibre traded this low? During the very bottom of the 2008 financial crisis. Then, there were worries about the entire U.S. financial system collapsing, which would cause almost every economy in the world to suffer. Apparently, slightly decelerating growth and the potential for a U.S. recession (not a Latin American recession) are enough to send this stock to the lowest depths it’s experienced.

I’m not buying this logic. What I am buying is MercadoLibre stock. If the stock reverts to its average valuation of a 10 price-to-sales ratio, it has a 150% upside. That’s not even including any more growth that MercadoLibre will likely experience.

Smart investing is about taking advantage of market opportunities when stocks and businesses become disconnected. This is exactly what has happened with MercadoLibre’s stock. I don’t say this often, but this may be a back-the-truck-up moment for MercadoLibre stock. Strong growth, cheap valuation, and a vast market opportunity make MercadoLibre a fantastic investment for the next three to five years.