Is It Time to Buy MercadoLibre Stock?

MercadoLibre's (MELI -0.42%) stock price sank by 16% on Nov. 7 after the company posted its third-quarter earnings report. The Latin American e-commerce leader's revenue jumped 35% year over year (103% in currency-neutral terms) to $5.31 billion, which exceeded analysts' consensus estimate by $30 million. But its net income only grew by 11% to $397 million, or $7.83 per share, which missed analysts' expectations by $2.02 per share.

That large bottom-line miss overshadowed the company's robust top-line growth. But could this pullback actually be a golden opportunity to buy into a high-growth stock that's still up nearly 40% over the past 12 months?

Image source: Getty Images.

MercadoLibre is still growing like a weed

From 2013 to 2023, MercadoLibre's gross merchandise volume clocked a compound annual growth rate (CAGR) of 20%, its total payment volume saw a CAGR of 54%, and its total revenue had a CAGR of 41% (in U.S. dollar terms). The number of unique buyers on its platform more than quadrupled from 20.2 million to nearly 85 million.

That growth was driven by the expansion of its e-commerce marketplace, which operates in 18 Latin American countries, but generates most of its revenue from Brazil, Mexico, and MercadoLibre's home market of Argentina. The company also expanded its Mercado Pago digital payments platform to add credit card, lending, and crypto services.

Over the past year, MercadoLibre's gross merchandise volume, total payment volume, and unique active buyers grew at high double-digit percentage rates as its revenue more than doubled in currency-neutral terms year over year in the past two quarters. Its gross merchandise volume and total payment volume growth cooled off slightly in the third quarter, but it still grew its unique active buyers at its fastest rate since the second quarter of 2021.

Data source: MercadoLibre. Currency-neutral terms. YOY = Year-over-year.

Management attributed that accelerating buyer growth to "better consumption trends" in Argentina, which was buoyed by the country's economic stabilization and the company's own growth initiatives.

Its fintech business also grew its total number of monthly active users by 35% year over year to 56.2 million as its assets under management surged by 93% to $7.97 billion. The ongoing expansion of that ecosystem, along with its recent application for a banking license in Mexico, puts the company in a good position to disrupt traditional banks in Latin America. It could also evolve into a digital-only "neobank" like Nu Holdings.

But its near-term expenses are rising

MercadoLibre is still growing rapidly, but its operating and net margins shrank sequentially and year over year in the third quarter, which resulted in its earnings miss. Its adjusted free cash flow (FCF) also declined 40% year over year to $635 million in the first nine months of the year.

Data source: MercadoLibre.

It attributed that "short-term margin pressure" to its rising investments across its business to "capitalize on the long-term, structural growth opportunities offered in Latin America." The expansion of its credit portfolio throttled its FCF.

MercadoLibre's strategy of sacrificing its near-term margins to plant the seeds of future growth isn't too surprising. The Latin American e-commerce market could still have a CAGR of 19% from 2023 to 2028, according to Mordor Intelligence. The World Bank estimates that more than 70% of Latin America's population is still unbanked, making it a fertile market for digital payment and banking services.

MercadoLibre has an early mover advantage in both of those niches, and it's smart for it to attempt to widen its moat with more investments. However, the pressure that puts on its bottom line might disappoint investors who had expected its growing scale to consistently dilute its operating costs.

MercadoLibre looks cheap relative to its growth potential

From 2023 to 2026, analysts expect MercadoLibre's revenue to grow at a compound annual rate of 28% (in dollar terms) as its EPS increases at a compound rate of 49%. Those are high growth rates for a stock that trades at 38 times forward earnings and 4 times next year's sales. Amazon, which is expected to grow at a much slower rate, trades at 34 times forward earnings and 3 times next year's sales.

MercadoLibre's valuations are likely being squeezed by near-term concerns regarding inflation and currency devaluation issues in Latin America, but it could head a lot higher as those headwinds dissipate. That's why I think long-term investors should simply tune out the noise and buy MercadoLibre's stock.