The Market Is Paying You To Own MELI. Why?
The market is offering a Latin American e-commerce giant at a steep cash discount, but the price tag comes with a serious question about the cost of growth.
MercadoLibre (MELI), Latin America’s e-commerce and payments operator, currently hands back 12.6% of its market value in free cash each year, while the median S&P 500 company offers just 4.2%. Yet over the past twelve months, as the S&P 500 returned 22%, MercadoLibre’s stock fell 17.6%. The market is making a very clear cash offer on a fast-growing business, then marking it down. Is this a temporary bargain, or is the market right to price in a breakdown?
The Ecosystem Is Generating Record Engagement
MercadoLibre’s cash generation is not an accident; it is the output of a powerful business model firing on multiple cylinders. The company’s revenue grew 46% over the last year, fueled by a flywheel between its commerce and fintech arms. Management points to “ecosystemic users,” those who use both the Marketplace and the Mercado Pago payments platform. These customers are “dramatically more profitable,” with a contribution profit that is “multiples of the sum of a Marketplace-only user and a Fintech-only user.”
The strategy is to invest in one side to strengthen the other. A year ago, the company lowered the free shipping threshold in Brazil. The result was a sustained step-change in user behavior. Conversion in Brazil is up 1.1 percentage points year-on-year, and items per buyer grew 19% in the last quarter. Meanwhile, its credit portfolio reached $16.4 billion, growing 75% year-on-year, feeding financial services to its large commerce audience.
But Is Management Buying Growth at Too High a Price?
The market’s hesitation is rooted in a single, stark number. This quarter’s EBIT margin of 6.7% was down 550 basis points year-on-year. Management describes this as a “deliberate choice to continue prioritizing investment in long-term engagement” over profit. But the market sees rising costs that may not be so temporary. These include an “increase in cost of devices because of higher cost of chips” for its payment terminals and higher logistics expenses from energy costs.
The company is choosing to absorb some costs and reinvest profits from its mature businesses into growth initiatives, but this isn’t an unfamiliar story for investors in the fintech space. Even companies that shower owners with cash can see their stocks lag if the market questions the sustainability of their profit model.
Brazil’s Shoppers Will Settle the Debate
The debate over whether today’s investments will create more highly profitable “ecosystemic users” or if the company is simply paying too much for growth will be settled by its biggest recent investment: the push for deeper engagement in Brazil.
The strategy’s success now hinges on the continued strength of Brazil’s conversion rate and number of items per buyer.
For more stocks the market has marked down while the cash kept flowing, our Buy the Dip screen runs exactly that screen, every day.
Like The Yield? Own The Discipline Behind It
High cash yields are the market’s most honest offer, and also its most loaded one: some are bargains, some are warnings, and telling them apart name by name is real work that never ends.
That is the work the Trefis High Quality (HQ) Portfolio systematizes: about 30 quality businesses screened for the cash generation, margins, and balance-sheet strength that make a yield trustworthy, then sized and re-balanced with discipline. It has a track record of outpacing a benchmark that combines the three major indices – the S&P 500, S&P Mid-cap, and Russell 2000. Enjoy the one you found; own the system that finds them all.