Should I Buy Mercado Libre Stock?

The South American e-commerce platform has been one of the year’s top performers, but should you buy Mercado Libre stock?

Nov. 6, 2020

Let’s start with the basics: what does Mercado Libre do? Originally an online marketplace similar to eBay, Mercado Libre has developed into a multi-faceted platform that encapsulates e-commerce, payment processing, and logistics across several countries, predominantly in South America. 

In this piece, I will outline the bull and bear case for the business and leave you with the information to decide whether Mercado Libre stock is a good buy for your portfolio. 

Bull case for Mercado Libre

Growth, growth, and more growth. In its most recent quarterly earnings call this week, Mercado Libre reported more than 100% growth on an FX neutral basis across revenue, total payment volume, and gross merchandise volume, with unique active users falling just shy at 92.2%. As the global pandemic has accelerated the move to digital adoption across the world, the business was perfectly poised to capitalize on the growing necessity for both e-commerce and digital payments.

Diversified revenue streams. As mentioned earlier, there is so much more to this company than just its e-commerce marketplace. Its logistics arm, Mercado Envios, shipped 187 million items in the last quarter, representing a 131% increase over the same period last year. Its digital payments platform, Mercado Pago, is posting record numbers as well, with total payment transactions growing by 146% this quarter to 560 million. This accounts for $14.5 billion in total payments volume. 

In moving into payments and logistics, the company has turned what was originally two of its biggest expenses into revenue generators. They also improve the user experience for both customers and merchants on the platform, giving it an edge over its competitors. 

Geographic diversification. I love Mercado Libre as a play for the growing e-commerce trend which is sure to become ubiquitous in everyday life, that goes without saying. But what is less obvious about this stock is that it provides me with a form of geographic diversification in my portfolio. By being able to capitalize on faster-growing economies outside of the U.S., you can protect yourself against a downturn in the domestic market. Other companies that could provide this kind of geographic diversification include Sea Limited in South East Asia and StoneCo who also operates in South America.

Bear case for Mercado Libre

Competition. There are some big names in play in the e-commerce sector in Latin America, with Amazon, Alibaba, and Sea Limited all building their presence in the region. This isn’t surprising considering the extent of the opportunity. The level of competition brings questions over Mercado Libre’s roadmap and it’s ability to maintain and develop its growth. It will have to rely heavily on its local experience and expertise, as well as building on the value of its ancillary services, to stay ahead of the game. 

Valuation. It’s no doubt that the company is on quite the run in 2020. Up over 130% year-to-date, and reaching new all-time highs, it’s lofty valuation will be off-putting to some investors. Especially considering it only turned a profit this past quarter. However, when it comes to growth stocks, the truth of the matter is that the very best of them will be overvalued for most of their lives as a public company. Just look at our old pal Amazon. With a long-term mindset, the premium for this level of growth becomes a lot more reasonable as the years go by and you avail of the wonders of compound growth. 

Should you buy Mercado Libre stock?

In my opinion, Mercado Libre has a big runway to grow as it expands across many fast-growing economies. While we’ve outlined that it may be pricey right now and it’s up against some fierce competition, the business has gone from strength to strength, and Q3’s astonishing numbers could just be the beginning for the company. 

In terms of the competition it faces, I am wary but not put off. Wall Street is prone to thinking in terms of a zero-sum game, but the reality is very different and Amazon’s expansion into Latin America will not be the end of this Mercado’s astonishing growth. It’s a stock I plan on holding for a very long time.

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