Is Mercadolibre a good stock to buy? In this analysis, we examine the issue of whether or not to buy Mercadolibre stock. We look at the organization from different angles. We will not give a buy recommendation, but we will emphasize the potential opportunities and risks. Buying Mercadolibre stock is risky, given its character as a growth stock. But in the long run, this could potentially lead to a serious annual return.
On to the analysis!
Stock Analysis: Mercadolibre (MELI)
Mercadolibre Inc (MELI), headquartered in Buenos Aires, Argentina, is Latin America's leading e-commerce technology company serving 140 million active users and 1 million active sellers across 18 countries. The company's service portfolio includes mobile and digital payment services, advertising solutions, and online store solutions.
Furthermore, it offers its users services that encompass both online and offline transactions. To buy Mercadolibre stock or not depends in part on your analysis regarding its business activities, including:
- e Mercado Shops online storefronts
- Mercado Pago FinTech
- Mercado Libre Marketplace
- Mercado Libre Ads
- Mercado Envios logistics service
- Mercado Libre Classifieds
The company provides products in the fields of computing, motorcycles, fitness, sports, clothes, food, and beverages. Following its initial public offering in 2007, the company was listed on Nasdaq (NASDAQ: MELI).
The company's strategy is to create significant value for its stockholders by offering an online marketplace and electronic payment service in Latin America that can improve the quality of life of its users. Through its platform, the company aims to bring a broader selection of products and services to buyers that are more affordable than those found on other online and offline platforms. Mercadolibre shares are somewhat similar to those of Amazon, although that party is significantly larger.
Price Target of Mercadolibre stock
Buying Mercadolibre shares or not depends in part on its stock price outlook. A growth stock like MELI typically has a higher financial valuation. We pay a premium to buy MELI stock now because we expect the company to be worth more in the near future. Paying a premium means that the risk (of loss) increases.
We have not done a comprehensive financial analysis on this stock. In outline, we see that Mercadolibre shares are likely to experience strong (sales) growth. The financial valuation is relatively high compared to other stocks, but relatively low compared to its own historical valuation. Since the company is still making losses, the risk is obviously higher.
Finally, the higher risk profile is also reflected in the price expectations of Mercadolibre shares:
According to Nasdaq, based on analysts' offering, the average price target for Mercadolibre (MELI) stock is $1,360.00, with a high estimate of $2,000.00 and a low estimate of $850.00.
According to WSJ, based on analysts' offerings, the average price target for Mercadolibre (MELI) stock is $1,448.24, with a high estimate of $1,750.00 and a low estimate of $850.00.
According to Wall Street Zen, based on analysts' offerings, the average price target for Mercadolibre (MELI) stock is $1,637.50, with a high estimate of $2,200.00 and a low estimate of $1,150.00.
Strengths and Weaknesses of Mercadolibre stock
Below is a summary of strengths and weaknesses of this company.
Strengths of Mercadolibre
- One of the major strengths of Mercadolibre is its geographic presence in different regions. With a presence in 18 countries, the business is able to reach the target market and be easily accessible.
- With a wide product portfolio, Mercadolibre can expand its customer base and offset the losses from one product category with the benefits from another.
- The company's strong social media presence online and efficient use of social media management has increased the effect of positive online word of mouth and built strong relationships with customers.
- With a strong financial position, Mercadolibre Inc. has been profitable every year for the last decade. It has also accumulated profit reserves that can be used to fund future capital expenditures. The company's in-store GMV grew 73% in constant currency terms in the first quarter, compared to 71% growth a year ago and 75% growth in the fourth quarter, when a two-year compound annual growth rate (CAGR) was taken into account.
- The automation of various production stages has allowed Mercadolibre Inc. to use resources better and reduce costs. The system also makes sure that its products are consistent in quality and provides the ability to scale up and scale down production according to market needs.
- The brand Mercadolibre Inc has been in existence for years, so people are familiar with it. Because of this, it enjoys a high level of brand awareness.
Weaknesses of Mercadolibre
- Dividend income-oriented investors might find its stock Mercadolibre unattractive since the company does not pay dividends.
- Even though Mercadolibre Inc spends more than the industry average on research and development, it spends much less than some players in the industry who have a significant advantage due to their innovative products.
- The time it takes for Mercadolibre Inc to buy and sell a product is longer than the industry average, which causes excessive inventory levels, adding unnecessary costs.
- The company's current ratio, which shows its ability to meet its short-term financial obligations, is lower than its industry average. If this trend continues, the company may experience liquidity issues.
- Due to a low level of current assets in comparison to current liabilities, the company may suffer from liquidity problems in its operations.
- It is expensive to replace existing experts within Mercadolibre. A relatively small number of employees manages Mercadolibre's knowledge base, and replacing them will be extremely difficult in the current climate.
Threats and Opportunities for Mercadolibre (MELI)
Threats and opportunities are important in a stock analysis, because investing in stocks is, above all, looking ahead. Below you will find an overview of opportunities and threats that may or may not make it attractive to buy Mercadolibre shares.
Opportunities for Mercadolibre
- This year, a number of e-commerce companies, including Amazon and Shopify, expect margins to decline as they increase spending.
- While Mercadolibre has invested heavily in expanding its managed fulfillment network and fintech services, its gross and operating margins have remained remarkably consistent over the past year.
- Within its overall growth strategy, the company pursues various strategic initiatives aimed at enhancing key business areas and gaining market share.
- A strategic acquisition is a key component of the company's growth strategy. Recently, Mercadolibre acquired Kinexo, an Argentinean software company. Through this acquisition, they can improve their software development capabilities.
- Following the pandemic, average household income has increased along with consumer spending. New customers can be attracted to Mercadolibre Inc. as a result of this.
- Mercadolibre has a great opportunity due to the migration of customers towards higher-end products because of the firm's strong brand recognition in the premium segment, and the firm's lower-priced brands have excellent customer service. The company will benefit from this and can increase profitability.
Threats for Mercadolibre
- Mercadolibre operates in a highly competitive market. If the company does not act in a proactive manner, it may lose market share and profit margins in the future.
- Company operations and financial performance are highly regulated in the industry in which it operates. Noncompliance with these regulations can have significant ramifications.
- There is no stability in the country's economic or financial environment because interest rates fluctuate. Businesses can suffer from political uncertainty in the country, causing performance to suffer and making them incur unnecessary costs.
- There is a change in consumer tastes, which puts pressure on companies to change their products to meet the needs of their customers.
- Regulations pertaining to international trade continue to change, and Mercadolibre must comply with them.
Risks analysis of Mercadolibre (MELI)
Mercadolibre has seen massive growth due to the recent pandemic outbreak. All three of the company's verticals - online payments, e-commerce, and logistics - are doing well. Nevertheless, despite steep gains in a short period, the stock Mercadolibre faces many risks in the future.
Although the company beat revenue estimates, it missed the consensus EPS forecast for Q1 2022. In the past year, the stock has lost 49.59%, underperforming the S&P 500 index, which lost 17.44%.
This recent price drop may well be a great opportunity to buy Mercadolibre shares for long-term investors. However, one needs to be sure, based on extensive research, that the company is going to achieve profit growth in the future.
Conclusion: to buy Mercadolibre shares or not?
As indicated, we do not offer personal advice on Mercadolibre stock buy or not. Moreover, this analysis is not sufficient because you also need to make a solid financial valuation of the company. Mercadolibre is a growth company. Its revenue growth is very impressive. Analyze whether its shares are currently priced favorably in relation to this future (earnings) growth.
This way you will find the answer to buy Mercadolibre shares or not.
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