2 Major Risks Investors Should Know Before Buying Mercadolibre's Stock
Investors in Mercadolibre Inc (NASDAQ: MELI), a leading e-commerce company in Latin America, have had a great time as the stock appreciated by more than 160% in the last five years. Solid growth in its e-commerce and fintech businesses has been the main driver of its stock performance.
Potential investors might consider investing in the company to ride the e-commerce-penetration tailwind in Latin America. But before they commit their hard-earned capital, there are two significant risks to watch.
Image source: Getty Images.
Competition is set to intensify in the coming years
Mercadolibre has been a major winner in the Latin America e-commerce tailwind over the last two decades. Equipped with its deep understanding of the local markets, the e-commerce company competed against giants like Amazon and prevailed.
In particular, Mercadolibre's localized-management approach allows the tech company to make the right decisions and hire the right people to lead the company. And since it doesn't have a head office to report to (compared to Amazon's management team that probably has to consult its leaders in the U.S. on major decisions), it has the flexibility and speed to execute its strategies.
And the result speaks for itself. Revenue grew from just $52 million in 2006 to $14.5 billion in 2023. It is also the clear leader in this region, with more than 20% gross merchandise value (GMV) market share.
In recent years, however, Mercadolibre has faced increasing competition from new e-commerce operators, especially those from Asia. Shopee, the e-commerce arm of Sea Limited from Southeast Asia, is topping the list.
Founded in 2015, Shopee came from nowhere to become the largest e-commerce platform in Southeast Asia, overtaking then-leader Lazada even though the latter has been operating in the market for many years. Shopee's secret recipe? A localized-management approach. The e-commerce company hires a local management team in each country, operates its app in different languages, and recruits local sellers to serve its customers.
Shopee has been using the same approach in Brazil to grow its e-commerce presence since 2019, with excellent results. For instance, a quick check on Sensor Tower shows that Shopee came ahead of Mercadolibre in terms of downloads in July for the App Store and Google Play Store.
If that's not bad enough, Mercadolibre also faces major Chinese players like Shein and Temu. The latter, in particular, is a subsidiary of the leading e-commerce platform Pinduoduo. Leveraging its parent's supply chain resources in China and operational know-how, Temu is an up-and-coming, cross-border e-commerce player that aims to build a global e-commerce business.
In short, investors should expect competition to remain intense in the future, which could impact Mercadolibre's growth and profitability. The only silver lining is that Latin America's e-commerce market is vast, so it can accommodate more than one player. For example, there are three major platforms in China and countless smaller platforms.
Mercadolibre's stock is priced for perfection
While the e-commerce industry has become more competitive lately, it has not stopped Mercadolibre from delivering solid numbers. For example, revenue surged 37% in 2023 to $14.5 billion, and net income more than doubled from $482 million to $987 million.
Understandably, investors were delighted by these numbers, sending the stock up by more than 50% in the last 12 months. But here's the thing. While existing investors benefit, future investors must pay a hefty price to own the stock. To put it into perspective, Mercadolibre has price-to-sales (PS) and price-to-earnings (PE) ratios of 5.5 and 76.2 times. Comparatively, Amazon's PS and PE ratios are 3.6 and 56 times.
While Mercadolibre's bulls are more than happy to pay up for the stock, the downside is that the tech company must meet investors' expectations or face a rerating of its stock. And the risk is real, especially as the incumbent faces well-funded and highly motivated competitors like Shopee and Temu. Just a single quarter of weaker-than-expected growth in revenue and profitability could send the stock plunging.
In other words, there is very little margin of safety in owning the stock, especially for the new investors.
What it means for investors?
Mercadolibre has had a remarkable track record of growth over the last two decades to become the leader in Latin America's e-commerce industry. Better still, as it continues to ride the e-commerce-penetration tailwind, it could continue to expand for years to come.
Yet, investors should not ignore the growing competition and its high valuation, so owning the stock would likely be a volatile ride.
Except for those with intestinal fortitude, investors would likely be better off staying on the sideline.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has positions in PDD Holdings and Sea Limited. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool has a disclosure policy.
