As the market continues its large sell-off of growth stocks, it’s more important than ever for growth investors to keep our long-term objective in mind – and to continue to build our positions in companies recently downgraded to gradually. Times like these, when investors can pick up shares of larger companies at lower valuations, may ultimately be the ones that cause our portfolio to outperform over the long term.
One company I am looking forward to increasing my stake in is MercadoLibre (NASDAQ: MELI). Here are three simple reasons why I think its value could quintuple by 2030.
The growing importance of MercadoLibre in Latin America
With more than 900,000 families saying MercadoLibre is their main source of income, the e-commerce giant is quickly taking root in the Latin American economy. Additionally, 40% of small and medium-sized enterprises (SMEs) selling on the company’s platform took out their first loans through Mercado Credito, the company’s finance unit. These merchant loans allow SMEs on MercadoLibre’s platform to expand their business and then increase their sales on the website, creating an orderly flywheel effect.
Additionally, as Internet penetration in Latin America continues to rise, MercadoLibre’s e-commerce and fintech offerings are poised to become more critical. Specifically, growing shares of the unbanked and underbanked populations in Latin America are turning to Mercado Pago and Mercado Credito for fintech solutions and lines of credit, respectively.
Perhaps thanks to these consumers’ openness to a sense of financial equality, MercadoLibre boasts a Net Promoter Score of 49, according to Comparably. This rating (on a scale of minus 100 to 100) also reflects the fact that 66% of customers surveyed said they would enthusiastically recommend its products and services to others, while only 17% are detractors who would not. wouldn’t do. That’s a pretty impressive result for any brand.
Perhaps best of all for investors is that the company’s active customer base of approximately 79 million users still has a massive growth streak ahead of it, given that the population of Latin America exceeds 600 million.
Abundant growth option
Of MercadoLibre’s nearly $1.9 billion in sales in the third quarter of 2021, about two-thirds came from its commerce segment, while the rest came from its fintech unit. Through these two avenues of growth, the company offers an intriguing mix of product and geographic options.
Starting with its commerce segment, MercadoLibre currently operates in 18 countries, but it is still in the early stages of building its logistics network, Mercado Envios. Although this unit is far from reaching its maximum operational efficiency, Mercado Envios has already achieved a penetration rate of 86% on its managed network, compared to 64% just a year ago.
Additionally, MercadoLibre has partnered with grocery chain Mambo in Brazil to pilot fresh grocery delivery, providing another attractive long-term growth option for the company.
As for its fintech segment, the company has several irons in the fire with its business units Mercado Credito and Mercado Pago. Mercado Credito offers cash advances to sellers on its e-commerce platform while also offering loans to buyers. By the end of the third quarter, the company had built up a portfolio of $1.1 billion in loans. However, investors will want to keep an eye on the share of delinquent accounts within this portfolio, as this metric has risen from 10% to 28% over the past year.
Finally, Mercado Pago offers payment processing, digital wallets, mobile payments, prepaid cards and many other fintech applications. Mercado Pago’s total payment volume grew 59% to nearly $21 billion in the third quarter, showing that MercadoLibre is much more than just an e-commerce site.
An improving risk/reward profile
After the share price plunged 40% over the past year, despite annual sales growth of 89%, the company’s reward part of its risk/reward proposition for investors has improved dramatically. .
However, after seeing its operating cash flow nearly halved since the start of 2021, MercadoLibre is far from a low-risk investment.
This decline in cash from operations is due to higher operating costs related to its logistics network and the continued expansion of its first-party e-commerce business. Together, these two expenses accounted for about five percentage points of MercadoLibre’s 43% gross profit margin.
Worse still, as economic turmoil from the impact of the pandemic continues to weigh on Latin America, the company lost an additional four percentage points of profit margin related to bad debts from expanding its credit portfolio. . As mentioned earlier, more than a quarter of the company’s credit portfolio is in default, creating a significant headwind for its long-term profitability.
Ultimately, MercadoLibre sacrifices short-term profitability for long-term cash flow generation, while struggling with its young credit portfolio. It’s important to remember that as recently as 2020, the company generated nearly $1 billion in free cash flow (FCF) while remaining entirely in high growth mode.
Overall, short-term headwinds have created a recently updated valuation for MercadoLibre, which now trades with a market capitalization, or company price, of $49 billion. However, I expect the company to gradually return closer to the $1 billion mark for annualized FCF (and possibly beyond) as its credit portfolio matures and continues to slowly improve. .
If he hit that FCF target, he would be trading around 50 times FCF, which would make his annual sales growth of 89% year-over-year incredibly cheap and $5,000 as a price target. feasible action. Whenever sales growth is greater than a company’s price relative to free cash flow, it catches my eye, making MercadoLibre’s leadership position and growth option attractively priced.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.