5 things to know about MercadoLibre shares before buying

When a stock becomes popular, many investors buy it without knowing much about the underlying company. This is understandable to some extent. When a stock is rising and people are talking about it, the natural reaction is to want to get in on the fun.

However, without knowledge about the company, it is much more difficult to decide whether to hold the stock in difficult times. Understanding the business is the key to successful long-term investing. So let’s try to understand MercadoLibre (NASDAQ: MELI).

This Latin American fintech has become a popular company, overtaking S&P500 by 78 percentage points over the last five years – thanks to impressive results. But is it worth having them now? Here are five things every investor should know about MercadoLibre before buying shares.

MercadoLibre operates a diversified business

MeradoLibre is a leading e-commerce company in Latin America, operating in 18 countries in Central and South America. Although the e-commerce market is its largest segment, it offers fintech offers, as well as logistics, advertising and other businesses.

Of these additional offerings, the fastest growing and most important segment that investors should keep in mind is Mercado Pago, the fintech industry. This represents approximately 42% of total revenues.

Development is the name of the game

The company’s impressive growth rate has put MercadoLibre in the spotlight of many investors. Year-on-year revenue growth of at least 30% has been a daily occurrence in this company for several years. In the last quarter, total revenues increased by 36%, driven by a 49% increase in sales segment revenues.

MercadoLibre also began to record an increase in revenues, which translated into further items on the profit and loss account. In the first quarter of 2024, operating income grew 26%, net income grew 71%, and the company generated $5 billion in free cash flow over the last 12 months.

The pace in the e-commerce market

After adjusting for the impact of foreign exchange, gross merchandise volume (i.e. the total dollar value of goods sold) on the e-commerce platform increased by 71% in the first quarter of 2024. Growth was particularly strong in Brazil and Mexico, each up 30% compared to 28 % in the first quarter of 2023

The same was true for total items sold, which increased by 25% in the first quarter, and the number of unique, active buyers, which increased by 16%. Overall, MercadoLibre continues to attract new customers who buy more over time.

Fintech’s commitment is impressive

Mercado Pago, the company’s fintech segment, started as a way for marketplace users to pay for goods. Over time, it has become a much more comprehensive banking and payment option for users.

The story continues

The number of monthly active Fintech users increased by 38% in the first quarter. Total assets under management increased by 90% to $5.5 billion, and the loan portfolio increased by 46%.

These metrics show that Mercado Pago is quickly becoming a valuable service for customers in a part of the world where there are fewer financial products available than what U.S. investors are accustomed to.

MercadoLibre has a reasonable price

Currently, MercadoLibre is trading at a price-to-sales (P/S) multiple of 5.6 and a price-to-free cash flow (P/FCF) multiple of 17. Neither of these are particularly expensive by comparison. For example, Amazon it trades for 3x sales and 42x free cash flow. Additionally, MercadoLibre’s valuation is cheaper than its five-year median on both P/E and P/FCF. Now it looks like a good entry point for the stock.

Is it worth investing $1,000 in MercadoLibre now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Jeff Santoro holds positions at Amazon and MercadoLibre. The Motley Fool covers and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.

5 Things to Know About MercadoLibre Stock Before Buying was originally published by The Motley Fool