MercadoLibre (MELI) is currently priced around $363 after opening the year just under $300. MercadoLibre’s stock sells for about 115 times its current cash profits. This is quite the lofty price considering the company’s earnings will grow at about a 25 percent clip across the next half-decade. If you are a strict value investor, MercadoLibre might not belong in your portfolio. Everyone else should consider this high-flyer.
Investors should think of this company as an ecosystem of sorts that integrates e-commerce services. These e-commerce services are primarily designed for those in markets throughout Latin America. The company’s vast e-commerce ecosystem is comprised of a marketplace platform in which third-party merchants can list items for sale. The system is also comprised of a platform for digital payments, a marketing platform and a virtual classifieds section. There is even a system for logistics and delivery. MercadoLibre’s home of Argentina now features a unique asset management platform revered by industry rivals. As of February 2019, the company is the top e-commerce player in a number of South American nations including Mexico, Peru, Costa Rica, Brazil, Argentina, Uruguay, Colombia and Chile.
MercadoLibre has a free cash flow of $130 million, a rather paltry sum compared to competitors and other companies of the same size. Furthermore, MercadoLibre has been in business for two full decades. The company has facilities in a number of countries, most of which are in South America. Argentina is ground zero for MercadoPago, a payment service noted more than 200 times in the company’s 10-K SEC filing. This unique payments platform was created to assist customers provide payment for goods on MercadoLibre marketplaces. The tech has since extended to the traditional offline arena after its successful web debut.
MercadoPago transactional volume increased more than 70 percent on a year-on-year basis following its debut. This pace exceeds that of the company’s overall revenue growth as well as income growth. In fact, MercadoLibre’s income growth was negative up until this past year. Furthermore, the MercadoEnvios platform is growing at a the rapid rate. This logistics and delivery system is exclusive for those in Mexico, Brazil, Argentina and Chile. The number of goods shipped through MercadoEnvios increased by 30 percent in one year alone. The platform is now capable of delivering items within 48 hours of order placement.
All in all, MercadoLibre does business in 19 countries throughout South America. The company is heralded as the region’s e-commerce king. In the end, what matters most is MercadoLibre’s exposure to the masses. The company does business in a region with more than 600 million individuals, many of whom become that much more familiar with the internet and e-commerce with each passing day.
Those who pay attention to geopolitics know South America is one of the least stable parts of the world. Unfortunately, MercadoLibre does business in most of these highly volatile nations. The company enjoyed a nearly 60 percent revenue spike in local currencies this past quarter, yet only a 17 percent gain in dollar-denominated growth. Furthermore, the bulk of MercadoLibre’s costs are in local currencies as opposed to the comparably stable American dollar. If currencies continue to fluctuate and the dollar becomes that much stronger, it could hurt MercadoLibre. The company abandoned its Venezuela offices after the nation defaulted on its government debt. MercadoLibre’s total loss from Venezuela topped the $85 million mark. Though it is unlikely a similar geopolitical crisis will unfold in Latin America in the near future, this region is notoriously unstable. Those considering an investment in MercadoLibre should be aware of the fact that the company faces a disproportionate level of risk due to its Latin American roots.
Investors are advised to hold off on new MercadoLibre positions until the price dips. As noted above, the stock is a bit overvalued at the current price. Stay tuned to see if Amazon takes aim at MercadoLibre’s market dominance in Brazil. The country boasts the globe’s 8th largest economy. If Amazon can take some of this massive market, MercadoLibre’s revenue will suffer a considerable hit. Furthermore, the company had a net loss of more than $100 million in the past year alone. Even though MercadoLibre has $130 million in free cash across the same period, the stock is exorbitantly priced. Wait for MercadoLibre to cool off before paying a premium for this growth stock.