1 Red Hot Latin Growth Stock
About ten years ago, MercadoLibre was a holding in Al Gore’s Generation Investment Management firm. At the time, the Latin e-commerce firm had barely made a dent on the radars of top money managers and traded around $117 per share. Now sitting close to $1,795 per share, the holding has proven to be a massive winner for the asset management firm, but now the question is whether it’s still a buy?
Key Points
- Mercadolibre has grown revenues by about 20x over the past decade and that has coincided with similar share price growth.
- The balance sheet has been fortified with billions in cash now to fuel further expansion.
- The company is trading at a high price-to-earnings ratio at this time and closing in on analysts consensus fair value target.
Latin Stock Growing Rapidly
In Latin America, Mercadolibre can be thought of as akin to a hybrid of eBay and Amazon. What has driven the growth is largely great execution as well as a massive, and rapidly growing market that continues to rise at about 20% per year.
As the market size has grown, so too have Mercadolibre’s revenues followed suit. A decade ago they were $472 million whereas in the most recent fiscal year they came in at $10.5 billion.
The explosion in the top line has now translated to a mushrooming in the bottom line with earnings before interest and taxes up to $1 billion for the first time in the past decade.
It’s also filled up the balance sheet coffers with over $3 billion in cash and short-term investments sitting on the books against $2.5 billion in long-term debt.
The business model has proven to be a winner but what about the stock, is it a buy?
Is Mercadolibre Worth Owning?
While it’s easy to point to some headline figures that make Mercadolibre compelling, such as the rapid growth, a superior logistics network, and a broad suite of products and offerings, gravity is likely to kick in soon and cause the price-to-earnings multiple to contract from the present sky high level of 92x.
It’s a tradeoff between the financial statements and future valuation forecasts right now. The financials continue to display fast growth and high margins, and ever growing profitability, while a cash flows analysis suggests the intrinsic net worth of the company sits closer to $1,500 per share, a meaningful downside correction from today.
Arguably, the high PE multiple is less stark when factoring in future earnings that are very likely to continue rising. Evidence of the growth can be seen in the firm’s MercadoPago offering that reported 121% YoY hike in payment volume.
Still, we would prefer to see a pullback from technically overbought levels before jumping on board this Latin tech giant that continues to go from strength to strength. On a dip, MercadoLibre appears to be a compelling buy but, for now, a cash flows analysis suggests the share price may have run a little too far too fast.
