MercadoLibre (NASDAQ:MELI) has earned a reputation for being not dissimilar to Amazon in Latin America.
Incredible growth year after year has earned it the comparisons, and produced soaring share prices.
Since the end of 2022 alone, shares of MELI have increased from under $1,000 to over $2,500. Is now the time to sell MercadoLibre and take profit from these gains, or does the stock still have additional room to run?
MercadoLibre Is Still Performing Extremely Well
Last year, the top line rose by 38% to a total of $21 billion thanks to gross merchandise volume climbing by 15% to $51.5 billion, and net income increased to $1.9 billion.
User experience was a big focus for management, specifically making it easier to navigate and filter products across various categories in order to lower friction when checking out.
This good news kept going in Q1 of this year when management announced revenue growth of 37% to $5.9 billion, representing a 44% increase in net income to a total of $494 million. Unique buyers on the platform during the quarter also rose 25 percent to 67 million, the highest growth rate the company had seen since 2021.
Plenty of Room for Growth
The runway is still long for shareholders and that is evidence in this year’s forecast by management to invest over $13 billion to grow the eCommerce business in Latin America.
Digital transformation is sucking up many industries in the region, and this investment is likely to pay off in the form of a largely ironclad moat around MercadoLibre’s eCommerce business in South and Central America.
Is MELI Stock Overvalued?
Given how quickly MercadoLibre shares have shot up, are they overvalued or is the pricing justified by the growth?
At first glance, the price multiples certainly point to overvaluation. Shares of MELI currently trade at 61.7x earnings, 5.7x sales, 25.4x book value and 19.7x operating cash flow. For most enterprises, these types of figures would suggest the share price is far and away above intrinsic value.
MercadoLibre’s valuation does, however, become quite a lot easier to swallow when one considers just how fast its earnings are expected to grow over the coming several years.
The expected annual earnings growth rate over the next 3-5 years is an astonishingly high 28.8%. Using the company’s trailing 12-month earnings of $40.66 per share as a starting point, this would price MELI at a little more than 17 times its expected earnings five years from now.
Right now, MELI certainly isn’t an undervalued bargain, but it does seem to be trading at a more or less fair valuation considering its huge growth opportunities. This view largely lines up with the analyst consensus price target of $2,716.81, which is about 8.3% above where the stock currently trades.
Will International Trade Pressures Tank MercadoLibre?
One of the top items on the minds of investors these days when looking at businesses is the possible effect of growing global trade tensions. Luckily, MercadoLibre is among the handful of businesses that may have some insulation from rising tariff pressures. Because it sells in Latin America, MercadoLibre doesn’t have much direct exposure to US trade policy. The company’s Fintech services are also extremely important in Latin America and will likely be used widely even if eCommerce sales tick down.
Of course, MercadoLibre still faces indirect exposure to the risk of lower consumer spending due to economic weakness in Latin American countries punished with high tariffs. This risk is far from negligible. Compared with many other businesses that face direct pressures on their margins due to trade tensions, though, MercadoLibre looks like it could be a decent choice for riding out current tariff concerns.
Is Now the Time to Sell MELI?
Although it’s always tempting to take profits when a stock has delivered the kind of incredible returns MercadoLibre has, shareholders may do well to remember a piece of investing wisdom made popular by Peter Lynch. In his landmark book One Up On Wall Street, Lynch described selling winning stocks while holding those that didn’t perform well as being like pulling flowers and watering weeds in a garden. With much more growth still anticipated from MercadoLibre, selling MELI seems to have a high chance of falling into the “pulling flowers” category.
Even with a very premium valuation, MercadoLibre still appears to have enough room left to run to be worth owning today. It’s worth keeping in mind that the company still has a total market capitalization of under $150 billion. Assuming it can keep delivering growth from eCommerce, Fintech and other services as Latin America embraces the digital age, there still appears to be ample headroom for shares to move higher.
Adding one more piece to the argument against selling MercadoLibre is the fact that the company has a fairly strong balance sheet. With $21.7 billion of current assets and only $6.3 billion of debt, MercadoLibre is in a fairly good position to ride out whatever economic challenges may arise. Combined with the other attractive qualities of the business, this seems to put yet another piece of information on the side of owning MELI instead of selling it.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.