Unlocking the Secrets of a Latin American E-commerce Giant
With a staggering 6,560% return since its initial public offering (IPO) in 2007, MercadoLibre (NASDAQ: MELI) has proven itself to be a behemoth in the world of e-commerce and fintech. An investment of $15,000 in MercadoLibre stock at its IPO would now be worth a whopping $1 million, making it a truly remarkable success story.
A Solid Foundation for Future Growth
Despite this impressive run, I believe the company’s best days are still ahead of it. MercadoLibre has reported solid earnings, but the stock recently dropped 10%, presenting a potential opportunity to add to my position at a discount. There are four key reasons why I think MercadoLibre looks like a once-in-a-decade opportunity today.
Riding the Wave of E-commerce Growth
MercadoLibre has grown its revenue an astonishing 33-fold over the last decade, with numerous megatrends working in its favor. The e-commerce penetration rate in Latin America currently lags behind the United States, United Kingdom, and China by roughly 10 years, providing a significant growth opportunity. The $150 billion Latin American e-commerce market is projected to grow by 50% over the next four or five years, with MercadoLibre poised to capture more than 50% of this incremental growth.
Logistical Investments for Long-term Success
The company’s decision to build five new fulfillment centers in Brazil and one in Mexico may have weighed on profitability in the short term, but it’s a strategic move to trade short-term profits for long-term cash flows. This investment in logistical infrastructure will pay off in the years to come, solidifying MercadoLibre’s position as a leader in the Latin American e-commerce market.
Untapped Potential in Emerging Markets
While 96% of MercadoLibre’s revenue comes from just three countries – Brazil, Argentina, and Mexico – there’s significant potential for growth in other Latin American countries. Chile, Colombia, Peru, and Ecuador have a combined gross domestic product similar to Mexico’s, yet they account for less than 5% of MercadoLibre’s sales. This presents a massive opportunity for patient investors willing to think decades ahead.
A Compounder with Outsize Profits
MercadoLibre’s ability to generate outsize profits from its invested capital is what could make it one of the biggest multibaggers of our time. Since 2020, the company has transformed from a mere growth stock into a true compounder, thanks to its rising return on invested capital (ROIC). With a ROIC of 18%, MercadoLibre ranks in the top 20% of companies in the S&P 500, making it an attractive investment opportunity.
A Once-in-a-Decade Valuation
Despite its impressive growth potential and high ROIC, MercadoLibre appears to be near a once-in-a-decade valuation. The company currently trades with a price-to-sales (P/S) ratio of 5.3, which is less than half of its historical average. Its 1.5% earnings yield is also at its highest consistent marks since 2017, making it an enticing investment opportunity. With monthly active buyer growth reaccelerating to 21% in the third quarter, fintech monthly active users and companywide revenue growing by 35% each, and strong underlying megatrends supporting its likelihood to continue, MercadoLibre looks like a once-in-a-decade opportunity at today’s price.
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