Smart investors like stock splits not just because they reduce a company's share price, but also because they tend to spotlight good companies. That's because forward stock splits are only necessary after substantial and sustained share-price appreciation, which rarely happens to mediocre companies. One good example is MercadoLibre (MELI -1.24%).
MercadoLibre's share price has soared 5,950% since its initial public offering (IPO) in August 2007, and Wall Street anticipates substantial gains in 2025. Among the 25 analysts following the company, the median 12-month target price is $2,339 per share. That implies 36% upside from its current share price of $1,725.
Whether or not MercadoLibre splits its stock matters very little. Investors should instead focus on the company's strength in e-commerce and digital advertising and the stock's attractive valuation. Here are the important details.
MercadoLibre is the market leader in e-commerce in Latin America
MercadoLibre operates the largest e-commerce marketplace in Latin America. The company accounted for nearly 28% of online retail sales in the region last year, and eMarketer estimates that figure will reach 30% by 2026. One reason MercadoLibre has been so successful is the breadth of its commerce ecosystem.
To elaborate, the company provides adjacent payment-processing services and credit products, fulfillment and shipping support, and ad tech software. Those solutions make the marketplace more convenient for merchants and create more monetization opportunities for the company. And MercadoLibre is a major player in several of those markets.
It has the "fastest and most extensive delivery network in the region," according to a company slide deck. It's also the largest retail media advertiser in Latin America and tied with TikTok as the fastest-growing ad tech company in the world in 2024, according to eMarketer. Finally, MercadoLibre has the largest fintech platform in Argentina, Chile, and Mexico, and the second largest in Brazil in terms of monthly active users.
MercadoLibre disappointed investors with its third-quarter earnings report
MercadoLibre reported relatively good financial results in the third quarter, despite missing estimates on the bottom line. Revenue rose 35% to $5.3 billion on strong growth in the commerce segment and modest growth in the fintech segment. But GAAP earnings rose just 9% to $7.83 per diluted share due to a 10 point contraction in operating margin.
That weak bottom-line growth disappointed investors, and the stock dropped sharply following the report. Shares currently trade 19% below their record high. On the bright side, the drawdown has created an attractive buying opportunity for patient investors because there are two perfectly good reasons why operating margin declined.
First, the company opened six fulfillment centers in the third quarter. That puts pressure on profitability in the near term, so margins will continue to suffer in the coming quarters until those facilities reach scale. However, the new fulfillment centers will ultimately support long-term growth and extend the company's superior logistics network.
Second, MercadoLibre reported a 13-point decline in NIMAL, which stands for net interest margin after losses. NIMAL tells investors how profitable the credit business is after funding costs and provisions for doubtful accounts. The 13-point decline in NIMAL means the company earned much less revenue per dollar in credit volume.
Management attributed that to three things:
- Above-average growth in credit cards, which have a lower NIMAL than other credit products
- More loans to low-risk borrowers, which carry lower interest rates
- An acceleration in credit portfolio growth, which reduces NIMAL because the company makes provisions for expected losses up front
In short, while lower margins and weak profit growth are less than ideal, they are temporary problems driven by investments in fulfillment infrastructure and credit products. And those investments should ultimately help MercadoLibre maintain and expand its strong position in the e-commerce and fintech markets.
Image source: Getty Images.
The future is bright for MercadoLibre, and the stock is relatively cheap
Online retail sales in Latin America are projected to grow at 10% annually through 2028, but eMarketer expects MercadoLibre's sales volume to grow a few percentage points faster, such that it continues to gain share. That implies equally strong growth in digital payments. And digital ad spending in the region is forecast to grow at 12% annually through 2028, but eMarketer expects MercadoLibre's ad sales to grow three times faster as it gains share.
In short, MercadoLibre has three tailwinds at its back. Consequently, Wall Street expects its earnings to grow at 45% annually through 2025.
That consensus estimate makes the current valuation at 61 times earnings look relatively cheap. Patient investors should feel comfortable buying a few shares today, whether or not MercadoLibre splits its stock any time soon.
