Is MercadoLibre Stock Overvalued?

Even though e-commerce stocks (like most tech stocks) took a downturn in 2022, companies such as Amazon have largely bounced back. MercadoLibre (NASDAQ: MELI) has drawn comparisons to Amazon due to the company’s e-commerce dominance in Latin America, but MercadoLibre’s business model is still closer to that of eBay.

The US online marketplace even had a stake in MercadoLibre during the Argentina-based company’s early years, which eBay held until 2016.

But while eBay’s stock has stayed stagnant over the past few years, MELI has risen to extraordinary heights. Since MercadoLibre shares dropped below $630 in the summer of 2022, the stock has soared 172% from that low.

Now trading at around $1700 per share, investors are understandably skittish about the firm’s future prospects to scale higher heights. But MELI is still trading almost 13% lower than its all-time high in early 2021 and the company has continued to expand its operations beyond e-commerce, including fintech and streaming.

So is MercadoLibre stock still a buy or rapidly turning into a sell?

Why Did MercadoLibre Stock Go Up So Much?

The company started out in 1999 after its founder was impressed by the success of eBay.

MercadoLibre quickly expanded across Latin America, and over the next decade, it opened locations in Chile, Brazil, and Mexico. In 2007, Mercadolibre went public and became the first Latin American tech company on NASDAQ.

It has been offering financial services since 2003 after noticing the opportunity to serve many Latin American customers who did not have banking accounts. The service, called MercadoPago, quickly became the largest online payment network in Latin America.

Initially just a digital wallet, MercadoPago has expanded to include full banking services. That includes MercadoCredito, which offers lines of credit to its customers. The company has also worked to expand beyond the eBay-inspired third-party auction model to offer more first-party products on its platform.

That expansion drove the construction of MercadoLibre’s own logistics operations. The company has announced upcoming distribution centers in Brazil and Mexico to meet the surging demand in those countries.

The success and expansion of all of MercadoLibre’s segments drove the stock up steadily after its IPO. After MELI picked up steam in the latter part of the 2010s, the stock shot up astronomically in 2020.

Will MercadoLibre Stock Keep Rising?

After the brief drop in 2022, MercadoLibre shares have bounced back vigorously.

A primary reason for the recovery is the company’s soaring revenue. In MercadoLibre’s 3rd quarter of 2023 earnings release, net revenue of $3.8 billion was up an incredible 39.8% from last year. That also beat analysts’ expectations by 5.88%.

Net income of $359 million was 178.2% above the same quarter of last year and diluted earnings per share came in at $7.16.

EPS was over 26% higher than experts expected. Profits have improved because the company’s margins improved from 11% last year to 18.2% in the 3rd quarter.

Those margins should continue to widen as the company gets its fulfillment center operational in Brazil. The country now accounts for 57% of MercadoLibre’s marketplace revenue, up from 53% last year. Revenue also showed healthy growth in Mexico and Argentina.

It was a solid quarter for the company, and that success was reflected in the stock price. MELI shares jumped by over 30% since the earnings release, from $1,300 to $1,715.

While there is little doubt that MercadoLibre will continue to increase revenue in the coming quarter, there are doubts that the stock can keep up the pace.

Is MercadoLibre Stock Undervalued?

According to 23 analysts, Mercadolibre stock is 8.4% undervalued with fair value sitting at $1,837 per share.

17 analysts rate the stock a Buy with the highest forecast betting on a 28% hike over the next twelve months to $2,200 per share.

While there aren’t any sell ratings on MELI currently, four Wall Street analysts call it a Hold. The lowest forecast predicts that MercadoLibre shares will fall by 12.7% over the next 52 weeks and land at $1,500 per share.

For all of the positives around the company, the recent run-up has likely scared off conservative investors. The firm’s 87.23 price-to-earnings ratio won’t do much to change that opinion. Even though the analysts still rate MELI as a Buy, the consensus 9.7% 1-year return won’t wow many investors either.

MELI share price is somewhat below where it was a few years ago, but not far below. Priced close to perfection now, a continuation of revenue and earnings beats are needed now to keep the stock on an upward trajectory.

The company is also looking to exploit its newly rebranded subscription service, MELI +. Similar to Amazon Prime, the service offers free shipping, music streaming, and access to Disney + and Star +.

MercadoLibre hopes to leverage the platform to increase engagement and spending in much the same way Prime has for Amazon.

Is MercadoLibre Stock a Buy or Sell?

The company’s leadership has expressed satisfaction with the initial results from MELI+, but the service just launched in Brazil and Mexico in August 2023. The upcoming earnings will give a much clearer picture of whether the new service is gaining any traction.

The third quarter was a winner for MercadoLibre, and the stock followed suit. The company’s fintech operations are solid, and it is improving its margins due to increased logistics efficiency. Revenue and profits were substantially improved from last year and beat estimates for the quarter.

Even though MELI may not post the gains it achieved in the last part of 2023, there are still plenty of catalysts that could drive the stock up. For that reason, investors who missed out on the stock’s rally could still have room to benefit over the next few years.

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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.