Thursday, August 4 2022

Jhe stock market often doesn’t make much sense in the short term. Emotions like fear and greed make her so unpredictable. Fortunately, a company’s fundamentals can act as a compass, helping the market recover over the long term, rewarding companies that continue to operate and grow while punishing those less deserving.

E-commerce business MercadoLibre (NASDAQ: MELI) was penalized by the market, down more than 15% over the past year. But rather than throwing in the towel, I see reason for optimism. Here are three reasons why I think the market will eventually turn to MercadoLibre and reward patient investors.

1. Strong business execution

MercadoLibre is a grassroots e-commerce company and has been at it since its founding in 1999, the turn of the millennium and the rise of the dot-com era. It’s not an overnight sensation, but rather a stable grinder that has invested in building the logistics, distribution and market presence to be the force in Latin America that it is today. today.

Image source: Getty Images.

MercadoLibre had 82 million unique active users at the end of 2021, an impressive feat in a region that features fragmented populations and an emerging economy compared to the United States. Things like banking and the Internet are not as obvious as they are in America.

According to eMarketer estimates, MercadoLibre is the undisputed leader in e-commerce in the region; it put MercadoLibre’s sales at about the same level as its six competitors added together. This dominance of e-commerce has opened up opportunities for MercadoLibre to expand into other businesses, such as financial services.

MercadoLibre’s performance is evident in its revenue growth, which is accelerating despite growing each year. The company has grown its revenue by an average of 37% per year over the past decade, but that average growth rate is 53% over the past five years and 70% over the past three.

2. Tailwinds for future growth

There are many ways for MercadoLibre to continue to grow over the next few years. Latin America has around 664 million inhabitants, which means that MercadoLibre has a long head start in penetrating its home market. As the Latin American economy matures, it should be easier for MercadoLibre to reach many of these people.

EBanx estimates indicate that Latin America is one of the fastest growing regions in the world for e-commerce. E-commerce in Latin America could be worth more than $200 billion, and many countries in the region have increased their e-commerce sales by 40% to 60% year-over-year in 2021.

But the key ingredient that could tie it all together is MercadoLibre’s fintech segment. It is the company’s fastest growing activity; in 2021, unique active fintech users grew 23% year-over-year to 34.5 million, digital wallets grew 36% to 19 million, and investment accounts grew 49 % to reach 22 million. People touch their money frequently, often daily, so MercadoLibre’s fintech business could be vital to staying involved in the lives of its customers.

3. Promotion of good deals

Investors have mostly shunned growth stocks in recent months, catching MercadoLibre in the carnage. The stock hit close to $2,000 per share before taking a discount of about 50%. The stock has rebounded, trading just under $1,200 today, but remains well below its highs.

To some extent, the sale was justifiable. The market euphoria that appeared to peak in November 2021 has pushed MercadoLibre well above its “normal” valuation, topping a price-to-sales ratio of 24 as the stock has spent much of the decade trading below a P/S of 12. Looking back, there was probably a bubble in growth stocks, and the market made an unpleasant but healthy correction.

But the pendulum may swing too far in either direction, and it seems that the hate on MercadoLibre is a bit overdone. The stock fell to a P/S ratio of just over 8, close to its lowest valuation in a decade.

Table of MELI PS ratios

MELI PS Ratio data by YCharts

However, the company is arguably doing better than ever. Growth has accelerated in recent years, and the company’s fintech business is quickly attracting users.

Investors are poised to see investment returns that at least reflect MercadoLibre’s growth and could even see a possible rise in the stock’s valuation. Nothing is guaranteed and MercadoLibre must continue to perform, but it’s hard not to like the risk opportunity versus the reward available today.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns and recommends MercadoLibre. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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