MercadoLibre (NASDAQ:MELI) is one of the best investments on the market, based on my analysis. My valuation model indicates that the Latin American e-commerce company could generate an 18% CAGR in its stock price over the next 10 years and that its current stock price offers over a 30% margin of safety for investment. Although there are risks with net income margin volatility, I am confident that management’s background in investment banking will lead shareholders to long-term prosperity and high annual returns for decades to come.
MercadoLibre is the most popular e-commerce website in Latin America, commanding a 35% market share in Brazil, significantly outpacing Amazon (NASDAQ:AMZN), which holds just 16.3% in Brazil (one of the region’s largest markets). With approximately 322 million monthly visits, it nearly doubles Amazon Brazil’s traffic and has almost 50 times the traffic of Amazon’s Spanish-language pages. Additionally, because MercadoLibre operates in 18 countries in Latin America, it has unparalleled regional coverage.
The company operates several other divisions within its main e-commerce operations, such as logistics, but one area that deserves specific attention, in my opinion, is Mercado Pago, the company’s fintech arm. Nearly 26% of the Latin American population remained unbanked in 2021, so MercadoLibre has developed a digital wallet that users can deposit cash into at partner locations. This opens the company up to a previously unaddressable demographic of customers and shows ingenuity and sensitivity to Latin American economics.
As of the latest quarter, MercadoLibre achieved a 35% year-over-year revenue growth rate, an 11% year-over-year net income growth rate, and a 35% year-over-year growth rate in Mercado Pago’s monthly active users. The company also opened six new fulfillment centers (five in Brazil and one in Mexico)a move that will benefit customer satisfaction through improved delivery speeds in the long run but may pressure the company’s margins in the near term.
MercadoLibre Is an Excellent Investment in Latin American E-Commerce
I mentioned Amazon previously, but there are other competitors that deserve to be addressed. For example, Walmart (NYSE:WMT) is leveraging its physical retail presence to strengthen its e-commerce operations in the region by bringing its Bodega Aurrera discount store chain online in Mexico. There are also regional players, like Magazine Luiza (Magalu), which reported hundreds of percentage points of growth in e-commerce revenues during the pandemic, and Falabella, which has a strong presence in Chile, Peru, and Colombia. Moreover, there is the entry of Chinese e-commerce giants into the Latin American e-commerce arena. Shein, an ultra-fast fashion retailer, has quickly gained traction in Latin America, with sales growing by over 800% since its entrance into the region in 2019. Temu and AliExpress are also targeting price-sensitive consumers in the region. However, MercadoLibre stands out due to its broad infrastructure and integrated ecosystem.
Operationally and financially, I’m highly bullish on MercadoLibre. The management team is also robust, with CEO, Chairman, and Co-Founder Marcos Galperin being at the helm for over 25 years and previously working at J.P. Morgan (JPM). The CFO, Martin de los Santos, previously worked at Goldman Sachs (GS). Moreover, Osvaldo Gimenez, the President of Fintech, has been with the company for more than 20 years and previously worked at Booz Allen Hamilton (BAH) and Santander (SAN). With such experience and length of tenure showing commitment to the company, I think the businessand my capital if I decide to investis in relatively safe hands.
Because I consider MercadoLibre to be an excellent long-term investment, my valuation model comprises a horizon of 10 years. I anticipate that the company will be able to grow its revenues at a 14% CAGR over the next decade. Starting with December 2024 annual revenue of $20.75 billion, my forecast arrives at $76.92 billion in annual revenue by December 2034. This accounts for an expanding and maintained market position but also considers market maturity and competitive constraints.
The company’s net margin has not been stable, but I am optimistic that this will stabilize in 10 years’ time. To be conservative, I use a terminal net margin of 17.5%, which accounts for fintech expansion, higher operational efficiencies related to automation, but also acknowledges the investments the company will need to make to maintain its market share amid increasing competition, including potentially more aggressive tactics from Amazon if its focus becomes less acute on AI by 2034. The result of my analysis is a December 2034 net income estimate of $13.46 billion.
MercadoLibre’s share count has been increasing at a CAGR of 1.38% over the past 10 years. If this trend continues, the company will have total shares outstanding of 58.55 million. Therefore, my estimate for the company’s earnings per share in December 2034 is $229.89.
MercadoLibre Is an Excellent Investment in Latin American E-Commerce
Due to an expanding net margin, MercadoLibre’s PE ratio is likely to contract significantly by December 2034. Its current PE ratio is ~60, and the sector median is ~20. I will be using the midpoint of these two figures, 40, for my terminal multiple. The result is a December 2034 price target for MercadoLibre stock of $9,200. This indicates a CAGR of 18.2% over the period from the present stock price of $1,730.
MercadoLibre Is an Excellent Investment in Latin American E-Commerce
MercadoLibre’s weighted average cost of capital is 13.74%, with an equity weight of 94.11% and a debt weight of 5.89%. The cost of equity is 14.29%, and the cost of debt, after tax, is 4.92%. When discounting back my estimate for MercadoLibre’s December 2034 price target to the present day using the weighted average cost of capital as the discount rate, the implied intrinsic value is $2,540. Therefore, the margin of safety for investment implied by my model is 32%.
While I find it unlikely, the company could encounter several difficulties which destabilize its net income. What is more likely is that by December 2034, the net income margin will be below 15% due to aggressive pricing by competitors, bad debt provisions from its credit operations, and rising logistics investments. This is where management’s investment banking experience will be valuable in driving long-term shareholder value through a consistent cost structure and investment program, focusing on retaining margins rather than becoming a company that exhibits profitability cycles, which is unattractive to most investors in the e-commerce industry.
I’m considering buying a stake in MercadoLibre due to its robust market position in Latin America and its nuanced understanding of the culture and customs. As my valuation model indicates an 18% CAGR in its stock price over the next 10 years and a 32% margin of safety, the investment appears a prudent addition to the growth side of a conservative, long-term portfolio. I expect much stronger returns from MercadoLibre stock than Amazon over the next decade due to both valuation and the relative size of the companies.
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