When stocks become popular, many investors buy them without knowing much about the underlying businesses. This is understandable to some extent. When a stock is going up and people are talking about it, a natural reaction is to want to be part of the fun.

However, without knowledge about a company, it's a lot harder to know whether to hold on to a stock when times are tough. Understanding a business is key to successful long-term investing. So let's try and understand MercadoLibre (MELI -1.24%).

This Latin American fintech has become a popular stock -- outpacing the S&P 500 by 78 percentage points over the last five years -- thanks to impressive results. But is it worth owning now? Here are five things every investor needs to know about MercadoLibre before buying shares.

MercadoLibre has a diversified business

MeradoLibre is the leading e-commerce company in Latin America, operating in 18 countries in Central and South America. While its e-commerce marketplace is its largest segment, it has a fintech offering, as well as logistics, advertising, and other businesses.

Of these additional offerings, Mercado Pago, the fintech business, is the fastest-growing and most important segment for investors to be aware of. It represents around 42% of total revenue.

Growth has been the name of the game

The company's impressive growth rates have put MercadoLibre on the radar of many investors. Year-over-year revenue growth of at least 30% has been commonplace for this company over the past several years. In the most recently reported quarter, total revenue grew 36%, driven by commerce segment revenue growth of 49%.

MercadoLibre has also started to see this top-line growth make it further down the income statement. In Q1 of 2024, operating income increased by 26%, net income grew by 71% and the company has generated $5 billion in free cash flow over the past 12 months.

Momentum in the e-commerce marketplace

After adjusting for currency-exchange impacts, gross merchandise volume (which is the total dollar amount of goods sold) on the e-commerce marketplace platform was up 71% in Q1 of 2024. Growth was particularly strong in Brazil and Mexico, which each growing by 30% on top of 28% in Q1 of 2023.

The story was the same with total items sold, which increased by 25% in Q1, and unique active buyers, which grew by 16%. Overall, MercadoLibre continues to attract new customers who buy more over time.

Fintech engagement is impressive

Mercado Pago, the company's fintech segment, started as a way for marketplace users to pay for goods. Over time, it has grown to be a much more well-rounded banking and payment option for users.

Fintech monthly active users were up 38% in Q1. Total assets under management grew by 90% to $5.5 billion, and the credit portfolio grew by 46%.

These metrics show that Mercado Pago is quickly becoming a valuable service for customers in a part of the world where there are fewer financial products available than what U.S. investors are used to.

MercadoLibre is reasonably priced

MercadoLibre currently trades for a price-to-sales (P/S) multiple of 5.6 and a price-to-free-cash-flow (P/FCF) multiple of 17. Neither of these is particularly expensive on a comparison basis. For example, Amazon trades for 3x sales and 42x free cash flow. Additionally, MercadoLibre's valuation is cheaper than its five-year median for both P/E and P/FCF. Now looks like a good entry point for the stock.