MercadoLibre's MELI current price-to-earnings (P/E) multiple of 40.01X represents a significant premium compared with the Zacks Internet - Commerce industry average of 25.73X, raising questions about valuation sustainability despite the company's market leadership and growth trajectory. While premium valuations are often justified for market leaders with strong growth prospects, the considerable gap between MELI's multiple and industry peers warrants careful investor consideration.
MELI’s P/E F12M Ratio Depicts Stretched Valuation
Zacks Investment Research
Image Source: Zacks Investment Research
Market Performance and Financial Results
The Latin American e-commerce and fintech giant delivered impressive third-quarter 2024 results with net revenues increasing 35% year over year to $5.3 billion and net income growing 11% to $397 million. However, the operating margin declined to 10.5% from 20% year over year, reflecting substantial investments in infrastructure and business expansion that could pressure near-term profitability despite strong top-line growth.
While this reflects strategic initiatives in fulfillment centers and credit card business expansion, it also signals potential near-term pressure on profitability. The company opened five new fulfillment centers in Brazil and one in Mexico, demonstrating its commitment to infrastructure growth but requiring significant capital expenditure.
Credit Business Expansion and Associated Risks
MercadoLibre's credit portfolio grew 77% year over year to $6 billion, with credit card TPV showing impressive growth of 166%. However, the rapid expansion of the credit business, particularly in credit cards which now represent 39% of the total portfolio (up from 25% last year), has led to increased provisions for losses and some pressure on Net Interest Margin After Losses, which declined to 24% from 37% year over year.
Market Position and Growth Prospects
The company maintains a strong position in Latin American e-commerce, with FX-neutral GMV growth of 34% in Brazil and 27% in Mexico. With e-commerce penetration in Latin America at only 15% compared with more developed markets, there's significant room for growth.
Although MercadoLibre has a strong foothold in the online retail market of Latin America, rising competitive pressure from the e-commerce giant Amazon AMZN, which is making strong efforts to expand its presence in LATAM, is concerning. MELI also faces strong competition from the retail behemoth Walmart WMT, which is making good progress in the region, especially in Mexico.
Investment Thesis and Recommendation
While MercadoLibre's long-term growth prospects remain attractive given its dominant market position and the underpenetrated Latin American e-commerce market, the current valuation at 40.01X P/S appears stretched. The company's strategic investments, while necessary for long-term growth, may continue to pressure margins in the near term.
Additionally, the rapid expansion of the credit business, particularly in a potentially challenging macroeconomic environment, presents some risk factors that investors should consider. While asset quality indicators remain stable with NPLs at 7.8%, the accelerated growth in credit card issuance and portfolio expansion requires careful monitoring.
The Zacks Consensus Estimate for 2025 is pegged at $25.66 billion, indicating year-over-year growth of 24.25%. The consensus mark for 2025 earnings is pegged at $44.65 per share, suggesting a year-over-year rise of 34.31%. However, earnings estimates have moved south by 0.6% over the past 30 days, indicating caution.
Zacks Investment Research
Image Source: Zacks Investment Research
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
Potential new investors might benefit from waiting for a more attractive entry point. The stock has returned 14.5% over the past year, underperforming the Zacks Retail-Wholesale sector’s growth of 31.4%. The stock price rally, combined with ongoing margin pressure from strategic investments, could create better buying opportunities in the near term.
1-Year Performance
Zacks Investment Research
Image Source: Zacks Investment Research
Bottom Line
Given the premium valuation, ongoing margin pressures from strategic investments and potential risks from rapid credit expansion, investors might be better served waiting for a more attractive entry point in 2025. While MercadoLibre's business fundamentals and market position remain strong, the risk-reward ratio at current valuation levels calls for holding the stock.
Those already holding the stock can maintain their positions given the company's strong market leadership and long-term growth potential. However, new investors might want to wait for either multiple compressions or stronger evidence that the company's investments are translating into improved profitability metrics before initiating positions.
In the meantime, monitoring key metrics, such as credit portfolio quality, fulfillment center productivity and margin trends will be crucial for assessing potential entry points in 2025. MELI stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
