MercadoLibre: Entry Price Expensive in Near Term (Rating Downgrade) (NASDAQ:MELI)

mercado libre (Nasdaq: Milli) Stocks have been lagging the market over the past year, despite their continued execution on the hypergrowth path.

With revenues growing by about 40% over this period, and profits doubling, the valuation problem became increasingly apparent.

Let’s dig deeper.

Poor performance of MercadoLibre

I initiated coverage of MELI stock with a Buy rating in February, estimating that the company will more than quadruple earnings per share by 2028. In the article, I review the company’s various business segments, its long-term prospects, and the significant tailwind it has as a digital leader in the regions Geography is rapidly developing.

Over the past year, MELI has underperformed the market, despite growing revenues of more than 40% and nearly doubling earnings per share. The reason is simple: the market expected these results.

This is a certificate to the company’s amazing execution but also reflects a big problem that MELI has no control over, which is valuation.

Let’s start with what MELI controls.

Growth accelerates, margins widen

After a disappointing Q4 2023 report, with lower-than-expected margins, mainly due to one-offs, MELI came out strong in Q1 2024, seeing revenue growth of 36%, and operating margins reaching a record. In the first quarter, it was 12.2%.

Revenues of $4.3 billion and EPS of $6.78 easily beat estimates. Geographically, this growth was led by Brazil and Mexico, which are also the company’s two largest businesses, with revenue growth of 57% and 59%, respectively.

While MercadoLibre is frequently referred to as the Amazon (AMZN) of Latin America due to its online marketplace, MercadoLibre has a huge financial services business, a space in which Amazon is not really involved. Other than that, there are a lot of similarities, as MELI is building its own Prime with MELI Mas, and is currently developing its advertising business.

In Q1 2024, fintech and credit revenues accounted for 43% of revenue, compared to 47% in Q1 2023, with merchant services outpacing all other business lines.

Digging deeper into the market, all operational metrics point to continued hypergrowth. GMV grew 71% on a constant currency basis, items sold increased 25%, and unique buyers reached 53.5 million.

On the financial services front, monthly active users reached 49.0 million, credit portfolio increased to $4.5 billion, and a record quarter for construction. Despite the rapid growth of the credit portfolio, MELI maintains healthy NIMAL margins of 31.5%, while 90-day non-performing loans decreased and provision coverage increased.

Overall, this was an exceptional quarter for MercadoLibre. The company has delivered on its promise to quickly recover margins, and remains the number one market in Latin America by a wide margin.

Opportunities for growth and competition

MercadoLibre operates in the fast-growing LATAM market, especially in Brazil and Mexico. These two regions are ripe for change, with growing populations, improving economies, supportive regulators, an ambitious working class, and a strong trend toward digital transformation.

The company’s offerings are tailored to this background, as they offer essential products and services at a quality that Latin Americans have never experienced before.

MercadoLibre is not the only company trying to capitalize on this massive opportunity, with notable competitors on both the e-commerce and fintech fronts.

In e-commerce, companies like Amazon and PDD’s Temu (PDD) are also in the business. In the fintech space, another company I cover is Nu Holdings (NU), along with several others.

Despite the intense competition, the opportunity in Latin America is enormous, and it is clear that MercadoLibre will be the first or second player in most of the sectors it enters.

So, we have a very big opportunity, coupled with exceptional execution.

The problem, of course, is evaluation

MercadoLibre trades at 47 times 2024 earnings, based on current consensus estimates, and 36 times 2025 estimates.

That’s higher than Amazon, and much higher than Nu, another Latin American disruptor. While Amazon is expected to grow much slower than MELI, its risk pool is much lower. When it comes to Nu, it is a capital-light company (unlike MELI), and it is expected to grow faster as well.

It’s also higher than Sea Limited (SE), which has a similar business more focused on Southeast Asia, and Coupang (CPNG), a comparable South Korean company.

There are many reasons why MercadoLibre is better executed, faster growing, less risky, or has more opportunity, but the bottom line is that buying MercadoLibre at these levels is buying high.

This is the main reason the stock has been essentially flat since my previous article, and why it has been lagging the market despite its extraordinary results.

Long-term view on valuation

In the near term, valuation is very important. There’s no denying that MercadoLibre’s numbers have been exceptional, yet the stock hasn’t budged. Continuing with this line of thinking, it’s hard to imagine what MELI could deliver in the coming quarters that would make the stock respond with a sharp increase, considering the very high expectations we’ve already discussed.

With all that said, over the long term, the company’s growth prospects, and its proven ability to deliver, are a clear path to the stock’s outperformance in the market as well.

These are the current consensus estimates for MELI’s EPS growth through 2028, which I’ve compiled from several providers:

I think there is a much greater possibility that MELI will exceed these expectations than miss them, but let’s stick with it. Let’s also take an exit multiple of 30x, which seems reasonable to me, considering that the company will have a significant growth runway ahead of it.

This would net us an annualized return of over 16% based on today’s stock price, with a target price of $2,717 by December 2027. Although this is attractive, I believe there are many opportunities that have higher upside in the near term.

I think MercadoLibre will outperform the market over the long term, but I wouldn’t rush into buying it at current levels either. Therefore, I downgrade the stock to Hold.

I expect the stock to end the year at around 38 times 2025 EPS, which equates to a target price of $1,715 per share.

In my previous article, I ignored the valuation hurdle, and also predicted faster margin expansion. As the company continues to invest in its future, the pace of margin expansion will be slower, but it will mean less upside in the near term as well.

Conclusion

MercadoLibre is an exceptional business, with a high-quality management team that undoubtedly executes on the company’s tremendous growth opportunities.

Despite the exceptional results, the stock has underperformed, due to the company’s overvaluation.

I believe that for MercadoLibre to outperform in the near term, it will have to easily overcome the very high expectations the market has for it. Although I expect consistent rhythms, I don’t expect them to be significant enough to drive further valuation expansion, as MELI already has a significant advantage over its lower-quality but very strong peers.

Therefore, I am rating MELI as a comment.