MercadoLibre: Scorching Growth vs. Rising Non-performing Loans

After the recent Amazon (NASDAQ: AMZN) stock split, another stock popped up on our radar in the ‘due for a stock split’ list: MercadoLibre (NASDAQ: MELI). This Latin American online commerce company closed on June 9 at $748.40. It’s too highly priced for retail investors, despite trading at a significant discount to its 52-week high. 

MELI stock hit a 52-week high of $1,970.13 in September 2021. Like other growth tech stocks, it has consistently trended downwards in the last six months due to various macroeconomic factors such as rising interest rates and higher inflation numbers, among others. 

MercadoLibre has lost almost 40% in 2022. However, the company’s fundamentals remain intact, and we think this is an excellent opportunity to pick this stock at bargain prices.

MercadoLibre’s Q1 earnings

MercadoLibre operates in 18 countries in Latin America. In Q1 of 2022, the company’s net revenues came in at $2.2 billion, up 67.4% compared to the corresponding period in 2021. Operating income came in at $139 million, while net income was $65 million, indicating a margin of 2.9%. MercadoLibre reported a net loss of $34 million in the year-ago period. 

MercadoLibre saw solid growth in its credit and fintech portfolios. Mercado Credito, the credit segment, closed Q1  with a portfolio of $2.4 billion, of which 53% were consumer loans, and credit cards accounted for 19%. The loan portfolio totaled $1.7 billion at the end of 2021. The company said almost 10 million users already have a credit line with Mercado Credito.

Its fintech active users stood at 35/8 million at the end of the March quarter. The engagement rates for the users were higher for wallet transactions while credit lines were offered to a widening user base. 

One point of contention for Mercado might be the rising NPLs (non-performing loans) in its portfolio. The company said, “…between the accelerated pace of originations in the fourth quarter and the mix shift into a higher exposure to consumer credit, total NPLs as a percentage of the outstanding portfolio is nearly 27.6%, up 330 basis points from the seasonably low rates in the fourth quarter.”

Rising inflation and a recession might cause NPL numbers to go up. Still, Mercado insists it will not impact the profitability of interest-bearing loans, which have been sustainable in recent quarters. 

What next for MELI stock and investors?

Harsh market conditions are not new to Mercado. The company had gone through the wringer in 2009 at the peak of the financial crisis. In Q1 of 2009, it reported revenues of $32.3 million. In the last 13 years, the company’s revenue has risen at an annual rate of 38.36%.

Statista figures say that less than 5% of sales in Latin America occur online compared to over 16% in the US. So while there might be a recession in the offing, there’s no denying that Mercado is best positioned across the continent to weather it.

MercadoLibre stock is valued at 3.3x forward sales, which is quite reasonable for a growth stock. The average analyst price target for this stock is $1,474.79. That’s an upside of over 83% from current levels.

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