Why MercadoLibre stock is cheaper than it looks

MercadoLibre (NASDAQ: MELI) is often compared to Amazon for its great success in the e-commerce market. Its focus on Latin America – with its emerging markets that have attractive prospects – has made it an intriguing growth base to own.

Over the past five years, the stock’s 150% return has outpaced Amazon, which is up about 97% over the same period.

Still, some investors may be concerned that MercadoLibre has become too expensive. It is trading at more than 70 times earnings, which may be a difficult valuation to accept, especially as concerns grow that the stock market may have overheated this year, and S&P 500 still breaking new records.

Why MercadoLibre stock looks expensive

The problem with looking solely at the price-to-earnings (P/E) multiple is that it only tells you how a stock is valued based on earnings over the last four quarters. If a company had a bad quarter or had an unexpected expense, it had an impact on these numbers.

In other cases, a company may be growing rapidly and generating strong market interest, but its margins are not high enough to prevent its profit multiplier from increasing too quickly.

MercadoLibre falls into the latter category. While profits grow, so does the stock price, profits grow at a slower pace.

Over the last 12 months, the company has achieved an average profit margin of just over 7%. That’s a decent margin, but the company is working to expand it. If successful, it will mean that more of each new dollar of revenue will contribute to the bottom line.

Investors should not overlook the promising growth potential

For growth-oriented investors, an important metric to consider is the price-to-earnings-to-growth (PEG) ratio. It takes into account the P/E ratio along with how much analysts expect the company to grow in the future (usually over the next five years).

And with a PEG ratio of less than 1.5, MercadoLibre stock may seem a bit pricey, but not by much. Growth investors typically consider a PEG of 1.0 to be the boundary between a good growth stock and an expensive one. The lower the PEG, the better buy it is. While MercadoLibre exceeds that threshold, it’s not significantly higher.

In the very long term, the company may have even more room to increase its value. It is a growing business present in 18 countries and with over 100 million active users.

Fintech is another development opportunity for MercadoLibre. It operates Mercado Pago, an online payment platform that merchants can use to accept bank and credit card payments.

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Is it worth buying MercadoLibre shares?

MercadoLibre could be a good option for growth investors to consider today. While its price may seem high right now, it’s important to always consider where the company could be not only in a year or two, but also five or ten years from now. And given that potential, MercadoLibre looks like a cheap buy.

The company has established itself as a big name in Latin America, and as those markets grow in size, the rewards can be significant for investors who are patient and willing to stay the course. The stock can also be a great way to diversify your portfolio and gain exposure to promising emerging markets.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dawid Jagielski has no position in any of the companies mentioned. The Motley Fool holds positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.

Why MercadoLibre Stock Is Cheaper Than It Looks was originally published by The Motley Fool