Is it too late to buy MercadoLibre shares?

The stock market has been on a growth streak for the past two years, with growth of over 40%. Latin American e-commerce company MercadoLibre (MELIA -0.32%) is doing even better. Shares are up more than 140%. That’s nothing new; MercadoLibre has been circling the market for years and has returned more than 5,600% since its 2007 IPO.

Buying into such a hot stock might seem like the wrong thing to do, like chasing a boat that has already sailed. But a look at MercadoLibre’s near-term and long-term opportunities should calm those fears. Here’s why MercadoLibre still has room to run and could continue to beat the market for years to come.

MercadoLibre: We’re just getting started

To recognize MercadoLibre’s investment potential, it’s important to understand the main industries it competes in. MercadoLibre offers e-commerce and financial services in Latin America. The combined population in which the company operates is over 500 million, although the population of the wider region exceeds 650 million.

Latin America is very different from the United States. Many consumers there lack access to e-commerce, the internet, and even basic banking services that many Americans take for granted.

MercadoLibre is a leading e-commerce retailer in Latin America, where e-commerce penetration is still just over 10%. The company’s 85 million customers make an average of just seven transactions each quarter. There’s plenty of room to grow its customer base and have them shop more often. MercadoLibre also has a fintech business that offers banking, payments, and loans to 45 million monthly active users.

Those two core businesses could fuel MercadoLibre’s growth for years, and they don’t account for new revenue streams. For example, MercadoLibre leverages its user data to build a digital advertising business that has grown its revenue tenfold over the past five years to more than $700 million. But it still has just 5% of the digital ad market, according to management.

The cumulative progress across the company over the past five years is evident in MercadoLibre’s top and bottom lines. Both revenue and free cash flow have increased since 2020:

MELI Revenue Data (TTM) by YCharts

MercadoLibre still generates just $16 billion in annual revenue. Latin America isn’t as rich economically as America, but it has a lot more people. The population base gives MercadoLibre plenty of room to grow in the coming years, and a maturing economy in Latin America, where consumers have more money, will only increase that.

This growth story could easily justify buying and holding the stock. This game is still in its early stages.

What about the short term?

MercadoLibre has pulled off an impressive feat. Despite rising 140% over the past two years, the stock has actually gotten cheaper:

PE MELI (Forward) data by YCharts

The stock’s forward P/E fell from around $75 to below $50, largely due to earnings per share, which rose from $8 to nearly $30. That’s no coincidence; MercadoLibre’s revenues grew at a similarly impressive rate, which outpaced its expenses (operating leverage) to generate profits.

Is 48 times earnings an attractive stock price today? Analysts believe MercadoLibre will grow earnings by an average of more than 40% per year for the next three to five years. In other words, the company could earn more than $100 per share within a few years. That would push the stock’s P/E ratio from nearly 50 to 16 within four years.

High initial valuations are much easier to stomach when a company’s earnings are growing rapidly. Shares become cheaper in the blink of an eye.

Is it too late to buy MercadoLibre?

It should be clear that MercadoLibre still has a lot of growth left in the tank. The stock should be attractive to both short-term and long-term investors.

E-commerce and financial services are huge industries in Latin America, full of growth opportunities. That’s why MercadoLibre’s main business units don’t seem to be anywhere near their peaks. The company could enjoy strong growth for a long time to come as Latin American consumers earn more and continue to gravitate toward the modern luxuries of online shopping and other services.

All investors can expect from a stock is a reasonable entry point, and its current valuation provides just that. Investors can confidently buy and hold the stock for what could be great results over time.

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