1 Large-Cap Stock With 10-Bagger Potential

MercadoLibre (MELI 2.36%) is often referred to as the Amazon (AMZN 2.60%) of Latin America because of its leading e-commerce market share in countries like Argentina and Brazil. But it’s so much more than that. In addition to its e-commerce marketplace, MercadoLibre has a massive payment processing business called Mercado Pago, a logistics platform called Mercado Envios, and a lending division known as Mercado Credito.

In a way, MercadoLibre is like the Amazon, PayPal, and maybe even the Block of Latin America, all in one company and at a much earlier stage of growth.

MercadoLibre’s stock hasn’t exactly been a strong performer lately, with shares down by about 55% from their 52-week high. But the company’s business is doing quite well and still has plenty of room to grow.

Recent results have been outstanding

To be sure, MercadoLibre’s growth has slowed down a bit since the COVID-19 pandemic caused a surge in e-commerce sales and fintech adoption. But it’s still growing impressively, especially when considering inflationary headwinds and recession fears.

In the second quarter, MercadoLibre’s gross merchandise volume increased by 26% year over year to $8.6 billion on its marketplace. The Mercado Pago fintech business now processes more than $120 billion in annualized payment volume, with more than two-thirds of the volume coming from outside the company’s e-commerce platform.

The Mercado Evios platform now ships over 91% of the items sold on the marketplace. And last but certainly not least, the Mercado Credito lending business is still young but has more than tripled in size over the past year, with $2.7 billion in outstanding balances. It’s also worth pointing out that interest rates in MercadoLibre’s markets are much higher than in the U.S., and the company achieved 34% interest margins after accounting for loan losses in the second quarter.

On the bottom line, MercadoLibre’s operating margins expanded nicely, allowing the company to generate an all-time-high operating income.

There’s no reason to think the growth won’t continue. E-commerce and fintech adoption in Latin America isn’t as far along as it is here. Cash is still used in the majority of financial transactions, and about 5% of retail sales are through e-commerce (about 15% in the U.S.).

Risks to know

To be perfectly clear, MercadoLibre isn’t a low-risk stock. Its business is likely to be quite cyclical. In a recession, consumers tend to buy fewer products and spend less money overall, which could lead to a slowdown for both the e-commerce and payments sides of the business. Plus, loan defaults tend to increase in tough times.

It’s also worth noting that while inflation is a problem in the U.S., it is really a problem in some of MercadoLibre’s biggest markets. Brazil’s inflation rate has been over 10% throughout 2022 so far, and Argentina’s inflation rate is a staggering 71% right now, with its central bank desperately trying to keep it from spiraling out of control.

Finally, while MercadoLibre is the leader in its key markets, it isn’t quite as dominant as Amazon is here. Amazon is certainly a key player in most of MercadoLibre’s markets, and newcomers — especially Sea Limited are building market share of their own. MercadoLibre should be able to keep its lead, but the competition is certainly worth watching.

Could MercadoLibre be a long-term winner?

MercadoLibre has a $45 billion market cap at its current share price, and while this may sound massive (and it is), it’s important to point out that the stock could 10x from here and still would be less than one-third of Amazon’s size. Given the massive potential for e-commerce and fintech growth in the region, as well as the potential in shipping, lending, and other future business lines, this could certainly be attainable in the next decade or so.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matthew Frankel, CFP® has positions in Amazon, Block, Inc., MercadoLibre, PayPal Holdings, and Sea Limited and has the following options: short January 2024 $200 calls on Block, Inc. The Motley Fool has positions in and recommends Amazon, Block, Inc., MercadoLibre, PayPal Holdings, and Sea Limited. The Motley Fool has a disclosure policy.

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