Free market (NASDAQ: MELI) is often compared to Amazon due to its strong success in the e-commerce market. A focus on Latin America – with its emerging markets offering attractive prospects – has made it an intriguing growth stock to own.
And over the past five years, the stock’s 150% return is much higher than Amazon’s, which is up about 97% over the same period.
But some investors may worry that MercadoLibre has become too expensive. It trades at more than 70 times its earnings, a valuation that could be tough to swallow, especially as fears grow that the stock market may have overheated this year, with the S&P500 and continues to set new records.
Why MercadoLibre Stock Looks Expensive
The problem with just looking at the price-earnings ratio (P/E) is that it only tells you how a stock is valued based on its earnings over the past four quarters. If a company had a bad quarter or had unexpected expenses, that would affect those numbers.
In other cases, a company may be growing quickly and generating a lot of bullishness in the markets, but the margins aren’t high enough to keep the earnings multiple from rising too quickly.
MercadoLibre falls into the latter category. While the topline has shot up and so has the stock price, the bottomline has risen more slowly.
Over the following twelve months, the company has averaged a profit margin of just over 7%. That’s a decent margin, but the company is working to increase it. If successful, that means more of every new dollar of revenue will flow to the bottom line.
Investors should not overlook the promising growth potential
For growth investors, a key metric to consider is the price-to-earnings growth ratio (PEG). This takes into account the price-to-earnings ratio and how much growth analysts expect the company to see in the future (usually the next five years).
And based on its PEG ratio of less than 1.5, MercadoLibre stock may seem a bit expensive, but not by much. Typically, growth investors see a PEG of 1.0 as the line between a good growth stock and an expensive stock. The lower the PEG, the better a purchase it is. While MercadoLibre is above that threshold, it is not significantly higher.
In the very long term, there could be even more room for the company to become more valuable. It is a growing company with a presence in 18 countries and has more than 100 million active users.
Fintech is another growth opportunity for MercadoLibre. The company operates Mercado Pago, an online payment platform that merchants can use to accept bank and credit card payments.
Should You Buy MercadoLibre Stock?
MercadoLibre could be a good option for growth investors to consider today. While the price may seem high now, it’s important to always consider where the company could be not only in a year or two, but also in five or ten years. And based on that potential, MercadoLibre seems like a cheap buy.
The company has established itself as a major brand in Latin America, and as those markets grow in size, the payoff could be significant for investors willing to be patient and stay the course. The stock could also be a great way to diversify your portfolio and gain exposure to some promising developing markets.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.
Why MercadoLibre Shares Are Cheaper Than They Appear was originally published by The Motley Fool
