MercadoLibre stock: as cheap as ever (NASDAQ: MELI)
Mercado Libre (NASDAQ: MELI) is one of those stocks that I never expected to get outright cheap. Yet that is exactly what has happened amid the ongoing tech crash. MELI offers an investment thesis as an undisputed leader of e-commerce in Latin America, which I expect will be a secular growth story for the next decade and more. While there are legitimate concerns about the credit performance of their credit portfolio, the stock is valued for strong returns as tech sector valuations normalize. I view stocks as a buy for long-term investors.
MELI share price
MELI peaked at nearly $2,000 per share, but is now trading just above $600 per share.
The stock is now back to pre-pandemic levels, although e-commerce operators are the main beneficiaries of the pandemic.
What is MercadoLibre?
MELI is the leading e-commerce operator in Latin America – some have even called it “the Amazon of Latin America”.
In addition to its e-commerce marketplace and logistics infrastructure, MELI also has a fast-growing fintech division.
Key measures of MELI shares
While many e-commerce operators are posting moderate or even negative growth due to difficult comparables related to the pandemic, MELI continued to generate strong growth with revenue growth of 67% in the last quarter.
Gross merchandise volume growth slowed to 32%, although the 2-year growth rate remained stable at 73%.
MELI was able to offset this slower market growth with continued hyper-growth of its fintech division, which grew 113% year-over-year.
A key driver of this fintech growth has been the rapid growth of its credit portfolio. Some investors may worry that the loan portfolio is growing too fast, as non-performing loans have steadily increased from 21.3% in the first quarter of 2020 to 27.6% this last quarter.
During the conference call, management reiterated its confidence in the sustainability of its growth as follows:
Most of the increase in NPLs is a consequence of product mix, and only a smaller portion of the increase in NPLs is due to improvements in existing products. So less than a third of NPL de-enhancements.
We continue to believe that the consumer data we have, the consumer touchpoints, the collection operations we have built are competitive advantages that help our underwriting. But notwithstanding, I think we need to continue to achieve this and continue to grow the books in accordance with our confidence in our underwriting, and then we’ll see what happens in the future. But so far all signs continue to be positive and are performing as expected.
My personal view reflects less confidence – hopefully non-performing loans will decrease over time. This increase in loss provision levels has been the main drag on operating leverage as operating margins have shrunk year over year despite significant cost reduction initiatives.
MELI ended the quarter with $3 billion in cash and short-term investments against $2.6 billion in debt, as well as $4.2 billion in its loan portfolio against an equivalent amount of associated liabilities.
Is the MELI share a buy, a sell or a hold?
MELI stock has still risen significantly over the past 10 years, but it has risen so rapidly during that time that the stock is trading at its lowest levels.
Consensus estimates call for solid double-digit revenue growth over the next decade.
MELI is expected to achieve operating leverage, eventually reaching an 18% net margin by 2031.
Based on a 14% exit growth rate, I could see MELI trading at 20 times earnings or more by 2031. This implies a stock price of $6,350 per share, or 10 times higher than current levels. This valuation would likely be conservative given that it would imply a price/earnings growth ratio (“PEG ratio”) of just 1.4x. There are a lot of risks here. Their credit portfolio may underperform in a weak economy and the business may not have enough cash to fully cover losses. Since MELI is an international company, there is also currency risk if the US dollar shows relative strength. Since the Last year, 55.3% of their net income was denominated in Brazilian reais, 21.7% in Argentine pesos and 16.6% in Mexican pesos. Finally, there are legitimate competition concerns. Sea Limited (SE), a dominant e-commerce operator in South East Asia, has attempted to be competitive in Latin America – this competition could compress acceptance rates and reduce long-term margin assumptions. It’s possible that the rising interest rate environment could ironically help dampen SE’s growth ambitions, but SE has proven willing to invest with losses for long periods of time. The stock’s current price appears to price in most of these risks, leading me to consider the stock a buy for long-term investors.