Picking a favorite stock is often a difficult task, even for seasoned investors. With more than 8,300 stocks trading on major U.S. exchanges, narrowing the choices to just one can be challenging. Moreover, investing goals and risk tolerances will lead to differing favorites from shareholders under the best of circumstances. That also assumes it is prudent to invest in only one stock, a move most every analyst will caution against.
MercadoLibre’s synergies and anti-fragility
Perhaps no business has mastered synergies better than MercadoLibre. The company started as an online seller in 1999. While it built a first-mover advantage in Latin American e-commerce, it has maintained that lead by fostering its antifragility. Antifragile companies become strengthened by threats to the business, turning these potential challenges into attributes.
Market challenges forced MercadoLibre to become antifragile early. A large percentage of its customer base buys everything in cash, a factor that could freeze customers out of e-commerce ecosystems. MercadoLibre developed a solution for this problem when it established Mercado Pago. It created payment products that allowed cash customers to buy electronically. So successful was that segment that the company opened Mercado Pago to non-MercadoLibre buyers.
Another challenge was fulfillment and deliveries. Businesses often could not process orders on their own. Also, logistics systems in MercadoLibre’s home region did not allow for rapid delivery in many cases.
To address these issues, the company started Mercado Envios in several of its markets. Through this service, the company could store, package, and deliver items to customers, often in one or two days.
The combination of these services draws businesses and consumers deeper into MercadoLibre’s ecosystem. Sellers could also use Mercado Pago to receive payments and Mercado Envios to handle orders. Some users also have an incentive to keep some cash with Mercado Pago as it offers accounts that can potentially generate income, yet another factor that makes the company essential to its users.
How the ecosystem boosted financials
The power of that ecosystem has carried MercadoLibre through an e-commerce slowdown and high inflation in some of its markets. Its $7.5 billion in revenue for the first nine months of 2022 was 53% higher compared with the same period in 2021.
During the first three quarters of 2022, MercadoLibre reported $25 billion in gross merchandise volume. But e-commerce revenue grew by only 22%. Instead, Mercado Pago drove most of the growth. During that time frame, its total payment volume climbed 65%, to $88 billion.
Additionally, the company reported net income of $317 million in the first nine months of 2022, 146% higher year over year. Although operating expenses grew faster than revenue, keeping the cost of revenue growth in check added to company profits.
Investors have also warmed to MercadoLibre stock in recent months. It has nearly doubled from its 52-week low, though it is about 40% below its all-time high. And though its price-to-sales (P/S) ratio of six is above peers like Amazon and Sea Limited, it is significantly cheaper than during the pandemic when the P/S ratio surged above 25. Such levels could still draw investors into MercadoLibre despite the recent stock surge.
Deciding on MercadoLibre
Investment goals and tolerances may differ. However, for growth investors willing to take a chance on a Latin American company, MercadoLibre could be the stock of choice.
It has built an ecosystem that would be hard for an Amazon or a Sea Limited to copy in its region fully. Additionally, because potential threats to the business have become strengths, the internet and direct marketing retail stock should grow as e-commerce and cashless payments become more common in its home region.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions in MercadoLibre and Sea Limited. The Motley Fool has positions in and recommends Amazon.com, MercadoLibre, and Sea Limited. The Motley Fool has a disclosure policy.