The extent of the e-commerce industry is likely not well understood by many investors. Some might assume Amazon dominates most of the world. And even if they know something about Amazon’s competitors, they might not understand that they are actually conglomerates involved in several other businesses.
One less-understood conglomerate is MercadoLibre (MELI 0.10%), often called the “Amazon of Latin America.” Along with its e-commerce segment, it operates a fintech business similar to PayPal, a logistics arm, and other businesses.
Moreover, aside from operating a successful conglomerate, other factors appear to make MercadoLibre an excellent stock. The following three factors could persuade more investors to buy it.
1. MercadoLibre’s addressable market
MercadoLibre operates exclusively in Latin America, serving a market that stretches from Mexico to the southern tip of Argentina. Despite challenges such as political instability or high inflation in some areas, the company has tapped into markets with considerable growth potential.
E-commerce researcher Digital Commerce 360 reported a compound annual growth rate (CAGR) in Latin American e-commerce of 23% in 2022. In comparison, Grand View Research estimates the CAGR for North American e-commerce at 14%, implying MercadoLibre could grow faster than its peers in more-developed countries.
Competitors such as Amazon do compete with it across the region, as does Asian e-commerce giant Sea Limited in Brazil and other countries to a lesser extent. However, MercadoLibre’s continued success is likely explained by its “anti-fragility.”
2. MercadoLibre’s anti-fragility
Anti-fragility means factors that may destroy other companies actually strengthen MercadoLibre.
Many of these factors quickly turned the company into a conglomerate rather than just an e-commerce company. Since Latin America is a cash-based region, it formed Mercado Pago to offer services that facilitated purchases on its site.
So successful is this businesses that the company opened it to those not buying on MercadoLibre. It also formed new revenue streams on its own. For example, Mercado Fondo, Mercado Pago’s investment business, offers investments that have helped Argentines mitigate the effects of hyperinflation.
Moreover, the region’s shipping systems did not offer same-day or next-day delivery on a large scale. Hence, it formed Mercado Envios, which allows customers to receive packages quickly, while providing storage and fulfillment services to businesses selling items on MercadoLibre’s site.
Such segments have become successful in their own right. And they strengthen one another by forming an ecosystem that fosters competitive advantages in its various businesses.
3. Growth and valuation metrics
MercadoLibre continued to experience rapid growth in the first quarter of 2024. Of its three largest markets, Brazil, Mexico, and Argentina, only Argentina experienced a reduction in revenue due to austerity measures to combat inflation.
Nonetheless, commerce-related revenue rose by 49% annually in the first quarter, while fintech revenue surged 22% higher over that period. With total revenue up 36% yearly to $4.3 billion, MercadoLibre continues to maintain rapid growth.
That led to first-quarter net income of $344 million, a 71% year-over-year increase. Also, given its price-to-earnings (P/E) ratio of 71, investors might not consider it expensive.
Furthermore, it sells at a price-to-sales (P/S) ratio of 5. That is higher than Amazon, which sells for around 3 times sales. Considering that Amazon grew its revenue by only 13% yearly in the first quarter, it’s arguable that MercadoLibre’s faster revenue growth justifies that premium.
Making sense of MercadoLibre stock
Ultimately, the bull thesis for the stock is one that investors should not ignore. The company has successfully capitalized on the tremendous opportunity in Latin American e-commerce. Its investments in improving e-commerce in the region have spawned other businesses under its umbrella, reinforcing its competitive advantages while forming businesses that stand independently.
And considering the rapid growth of the internet and direct-marketing retail stocks, MercadoLibre’s earnings and sales multiple appear relatively muted. So not only should its business expansion continue, but it is also not too late to buy into this opportunity at a reasonable price.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions in MercadoLibre and Sea Limited. The Motley Fool has positions in and recommends Amazon, MercadoLibre, PayPal, and Sea Limited. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.