5 things to know before buying MercadoLibre stock

When a stock becomes popular, many investors buy into it without knowing much about the business behind it. To some extent, this is understandable: When a stock goes up and people are talking about it, it's a natural reaction to want to join in the fun.

But without knowledge of the company, it's very difficult to know whether you should hold on to a stock when times get tough. Understanding a business is the key to successful long-term investing. So let's try to understand. MercadoLibre (Merry 1.51%).

This Latin American fintech S&P 500 It's up 78 percentage points over the past five years, thanks to its impressive performance. But is it worth owning now? Here are five things every investor should know about MercadoLibre before buying shares.

MercadoLibre is a diversified business.

MeradoLibre is a leading Latin American e-commerce company with operations in 18 Latin American countries. E-commerce marketplaces are its largest segment, but the company also offers fintech, logistics, advertising and other businesses.

Of these additional services, the fintech business, Mercado Pago, is the fastest growing and most important segment for investors to watch, accounting for about 42% of total revenue.

Growth is the goal of the game

MercadoLibre has attracted the attention of many investors due to the company's impressive growth rate. Over the past few years, year-over-year revenue growth of 30%+ has been the norm for the company. In the most recent quarter, the company saw total revenue increase by 36% and commerce revenue growth increase by 49%.

For MercadoLibre, this revenue growth is starting to filter down further down the income statement: In the first quarter of 2024, operating income increased 26% and net income increased 71%, and the company generated $5 billion in free cash flow over the past 12 months.

E-commerce market momentum

After adjusting for currency effects, gross merchandise volume (the total value of goods sold) on e-commerce marketplace platforms increased 71% in the first quarter of 2024, with growth particularly notable in Brazil and Mexico, which each grew 30% on top of 28% in the first quarter of 2023.

The total number of items sold in the first quarter increased by 25%, and the number of active buyers increased by 16%. Overall, MercadoLibre continues to attract new customers who buy more items over time.

Fintech initiatives are impressive

The company's fintech division, Mercado Pago, started as a way for marketplace users to pay for goods, and over time has grown into a more comprehensive banking and payment option for users.

The Fintech's monthly active users grew 38% in the first quarter. Total assets under management increased 90% to $5.5 billion, with the credit portfolio growing 46%.

These indicators suggest that Mercado Pago is quickly becoming a valuable service for customers in parts of the world where fewer financial products are available than U.S. investors are accustomed to.

MercadoLibre is Affordable

MercadoLibre's stock is currently trading at a price-to-sales ratio (P/S) of 5.6 and a price-to-free cash flow ratio (P/FCF) of 17. Neither of these is particularly expensive by comparison. For example, Amazon Trading at 3x revenue and 42x free cash flow, MercadoLibre's valuation is also cheaper than the past five-year medians on both its P/E and P/FCF ratios. Now seems like a good time to buy the stock.