Key Points
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MercadoLibre’s investments may be harming margins right now, but they could be worth it over the long run.
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The company still has a strong competitive edge that can allow it to remain the leader in its niche.
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MercadoLibre is capitalizing on fast-growing, high-margin opportunities.
- 10 stocks we like better than MercadoLibre ›
Investors have sold off MercadoLibre‘s (NASDAQ: MELI) shares over the past year. Between rising competition in its e-commerce market in Latin America and worse-than-expected profits and margins, many are increasingly skeptical of the company’s prospects. The stock has declined by 22% over the trailing-12-month period as a result. However, it may be too early to give up on MercadoLibre as there are good reasons to expect the business to bounce back eventually. Let’s consider three of them.
1. Investing for the future
In the first quarter, MercadoLibre’s revenue increased by 49% year over year to $8.8 billion. However, the company’s operating income dropped 20% year over year to $611 million, with its operating margin sliding by six percentage points to 6.9%. On the bottom line, MercadoLibre’s earnings per share declined to $8.23, down from $9.74 in the prior-year quarter — it came in below analyst estimates, sending the stock sharply lower.
But it’s worth putting things in context. MercadoLibre is deliberately investing heavily in the business. That’s what’s causing lower profits and margins. The question is whether the company’s efforts are likely to pay off in the long run. My view is that they are. Consider MercadoLibre’s decision to lower the free shipping threshold. E-commerce leaders have had tremendous success with this strategy, as it can attract more users to the platform and boost gross merchandise volume (GMV). MercadoLibre is already seeing results: The company’s GMV in Brazil, its largest market, accelerated during the first period, partly thanks to this move.
Elsewhere, MercadoLibre is expanding its credit card business. This will inevitably hurt the bottom line in the near-term, since the company is required to recognize expected credit losses upfront as an income statement item. But MercadoLibre operates in significantly underbanked regions, and by doubling down on its credit card businesses, it could eventually establish itself as a leading online bank. That could pay off rich dividends down the road, despite the negative impact these investments are having on its financial results right now.
2. MercadoLibre’s competitive edge
MercadoLibre is a leader across several categories in Latin America, including e-commerce and fintech. The company has faced increased competition lately, particularly from Shopee, an online commerce platform owned by Sea Limited (NYSE: SE). There should be room for multiple winners over the long run, especially since Latin America has been one of the fastest-growing e-commerce markets in recent years, and the industry should maintain a strong momentum at least over the medium term. But there is at least one other reason why MercadoLibre’s future still looks bright: The company benefits from a wide moat.
For instance, MercadoLibre boasts deep network effects. The more merchants are on its platform, the more attractive it is to shoppers and vice versa. MercadoLibre also benefits from high switching costs. Online merchants rely on the company for a range of services, from setting up e-commerce storefronts, marketing, payment processing, inventory management, and much more. It’s not easy to jump ship after setting up all these services within a platform. Further, MercadoLibre has established a large logistics network across Latin America, including several countries that are somewhat politically unstable. That’s not easy to replicate, as it requires significant upfront investment. These advantages make it likely that MercadoLibre will remain a leader in its core markets for the foreseeable future.
3. Attractive growth opportunities
MercadoLibre is best-known for its core e-commerce and fintech businesses. However, the company has been slowly ramping up other growth opportunities that could significantly improve its financial results over the long run. One of these is advertising. It is one of MercadoLibre’s fastest-growing segments. In the first quarter, the company reported that advertising revenue soared by 63% year over year. MercadoLibre benefits from a deep ecosystem and a mountain of data on consumer spending habits, which it can use to help companies craft highly targeted ads. Also, advertising is a high-margin business that will eventually help lift the company’s profits and margins.
An attractive long-term bet
Some will argue that MercadoLibre’s shares remain fairly expensive. It is trading at 36x forward earnings, compared to an average of 25.3x for consumer discretionary stocks. But given the company’s multiple growth avenues, wide moat, and efforts to improve its business that are already bearing fruit, the stock is worth a premium. MercadoLibre has already started bouncing back. Its shares are up 13% over the past month. It’s not too late to invest, though, as the stock still looks well-positioned to deliver superior returns over the long term.
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Prosper Junior Bakiny has positions in MercadoLibre. The Motley Fool has positions in and recommends MercadoLibre and Sea Limited. The Motley Fool has a disclosure policy.
