MercadoLibre (MELI -1.82%) has been a great stock for patient long-term investors but has been in a slump since the company’s latest earnings report. In the roughly two months since then, MercadoLibre has fallen by about 20%.
While the initial decline was due to missing expectations on the bottom line and there are some legitimate profitability concerns, this could be an excellent time for long-term investors to buy shares. Not only are MercadoLibre’s core business growing at a rapid pace, but there are some big future catalysts that could multiply revenue several times in the years ahead.
One thing that's important to mention is that MercadoLibre’s share price is in the $1,700 range, so you’ll need to use a broker that offers fractional share investing to buy $500 worth of its stock. But it can be a great way to put your money to work.
MercadoLibre has short-term profit issues, but is still growing rapidly
As mentioned, the biggest reason why MercadoLibre fell after earnings is that it missed profit expectations. The company’s EBIT margin declined by 7.4 percentage points year-over-year in the third quarter, due to a combination of more growth investments and bad debt. And free cash flow was actually negative.
To be clear, this is certainly worth keeping an eye on. But it’s important to acknowledge that MercadoLibre’s business is still growing quite rapidly. The e-commerce marketplace sold 28% more items than it did a year ago and added more than 10 million active buyers. The Mercado Pago payment processing business grew 34% year-over-year and now has more than $200 billion in annualized payment volume. And last but not least, the young but impressive credit business now has $6 billion in outstanding loan balances, up 77% from the third quarter of 2023.
Several reasons to like MercadoLibre right now
First and foremost, MercadoLibre’s core businesses could still have tons of room to grow. E-commerce penetration in the United States is about 16% of total retail and is even smaller in the Latin American markets where MercadoLibre operates. The same can be said for cashless payment adoption, and there’s a large underbanked or unbanked population in this area of the world.
The Latin American market has more than 650 million people (about twice the size of the U.S.), and with logistics rapidly improving in the region, it will enable far more online buyers and sellers.
It’s also important to mention that MercadoLibre has several other businesses that are still in the very early stages and have high potential. The company’s credit card business (part of the credit portfolio mentioned earlier) nearly tripled in size over the past year. There’s the investment platform that is still in the relatively early stages and saw assets under management (AUM) climb 93% in the most recent quarter.
In addition, there’s the Mercado Ads advertising platform that is just starting to move beyond product ads and could be a big driver of high-margin revenue in the years to come. And the brand new two-tiered pricing of the MELI+ subscription business (similar to Amazon’s (AMZN 0.01%) Prime) could help grow engagement with the company’s ecosystem.
There’s also valuation to consider. Although the stock has climbed by about 180% over the past five years, the incredible growth in its business has pushed its valuation lower by most metrics. For example, MercadoLibre trades at a price-to-sales (P/S) multiple that is about 64% less than five years ago. It trades for a historically low valuation of just 14.5 times trailing 12-month free cash flow, compared to a multiple of about 96 at the start of 2020.
MELI PS Ratio data by YCharts
The bottom line
MercadoLibre is down by about 20% from recent highs, but by several metrics, the stock has become even cheaper than this figure indicates. With stellar growth momentum and a massive future opportunity, MercadoLibre is towards the top of my buy list as 2025 gets underway, even though it is already one of my largest investments.
