High levels of inflation, rising interest rates, and concerns about weakening economic conditions this past year combined to create a challenging market backdrop for growth stocks. With macroeconomic pressures and the evaporation of pandemic-driven tailwinds, the valuations of many companies in the e-commerce space were particularly hard hit.
One positive aspect of this situation is that big sell-offs pushed the valuations for some top online retail players down to more attractive levels. Putting your money behind the right ones could have a big payoff over the long term.
If you’ve got $1,000 available to invest, you might want to consider putting it toward an underappreciated e-commerce stock that has some potential to be an even bigger winner than Amazon. Here’s why.
MercadoLibre has what it takes to be a big winner
MercadoLibre (MELI 2.76%) is sometimes referred to as the “Amazon of Latin America” because it stands out as the region’s leading online retail platform. With the stock price down roughly 41.5% from its high, the Latin American e-commerce player looks like a worthwhile buy for long-term investors.
The adoption of e-commerce and payment-processing services in the Latin American market is still in its early stages, and the comparatively nascent state of these industries means that there’s still greater room for growth. The significance of this can be seen in MercadoLibre’s recent business performance.
While many e-commerce players with operations concentrated in the U.S., Europe, and other markets saw growth slow dramatically over the last year, MercadoLibre continued to serve up very strong rates of sales expansion. Spurred by 31.5% year-over-year growth for its e-commerce platform and a more-than-76% jump in transaction volumes for its payment-processing business, MercadoLibre’s revenue rose 60.6% in the third quarter to reach $2.7 billion. Meanwhile, net income climbed 35.8% year over year in the period to reach $129 million.
Performance looks even more impressive if you zoom out and look at sales growth over a longer timeline.
Recording revenue growth of more than 662% over the last five years, there can be little doubt that MercadoLibre’s services are in demand and resonating with customers. Meanwhile, net income has grown more than 1,630% over that stretch.
A growth-dependent valuation, but one that leaves room for big upside
Even after some big sell-offs, MercadoLibre’s high forward-looking valuation may make the stock too speculative for more risk-averse investors.
Trading at roughly 76.5 times expected forward earnings, MercadoLibre admittedly has a growth-dependent valuation. But a price-to-earnings ratio rarely tells the whole story, and investors should also consider how quickly the company is managing to expand its profits.
The price-to-earnings-growth (PEG) ratio divides a company’s price-to-earnings ratio by its rate of earnings growth. For reference, a price-to-earnings-growth ratio below 1 is often viewed as an indication that a stock is undervalued because it suggests that there is earnings growth that hasn’t been priced into a company’s share price. With its current forward PEG ratio sitting at less than 0.1 by this metric, MercadoLibre actually looks quite attractively valued.
While the law of large numbers and the potential for economic headwinds suggest that earnings growth will decelerate some, the Latin American e-commerce leader has proven that it can expand profitably and still has a wealth of untapped opportunities ahead. Valued at roughly $58.4 billion and down big from its high, MercadoLibre has what it takes to deliver strong returns for investors who buy the stock at today’s prices.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com and MercadoLibre. The Motley Fool has a disclosure policy.