A closer look at MercadoLibre; Greetings from Italy
I'm continuing my series of "closer looks" at high-quality businesses with beaten-down stocks, which started with Boston Scientific (BSX) on July 2, then Netflix (NFLX) on Monday and yesterday.
Today, I'd like to do the same for Latin American Internet giant MercadoLibre (MELI).
When I took a quick glance at the stock on June 22, I concluded that it was trading at a rich multiple. But as I said, "it's a market-leading, high-growth company, so maybe it's worth a high multiple."
Let's see if that's true by diving deeper into the company's financials and valuation...
MercadoLibre's stock is down more than 30% from the all-time high it hit a year ago. It's now around a price it first reached more than five years ago:
The company has been an extraordinary growth story, similar to Netflix. Revenues and operating income have risen approximately 600 times in the past two decades (no wonder the stock soared nearly 100 times since its 2007 IPO):
MercadoLibre has one of the most beautiful free cash flow ("FCF") charts I've ever seen...
FCF fluctuated between $50 million and $200 million from 2008 through 2018. But it has risen nearly 100-fold since then to hit $11.8 billion in the past 12 months:
The company hasn't done much with its FCF yet, other than pay a small dividend, make a few acquisitions years ago, and buy back $1 billion of stock from 2020 to 2023:
With FCF exploding and no dividends, acquisitions, or share repurchases in the past two years, one would expect MercadoLibre's net debt to be declining rapidly. But in fact, it's doing the opposite:
The reason for this can be found on the cash-flow statement, under net changes in loans receivable:
This growth reflects the company's push into lending – what MercadoLibre calls a "fintech" business. Whether this is a smart move is open for debate...
Turning to valuation, analysts expect the company to earn $39.96 per share this year, around the same as last year. But they project earnings to soar 44% in 2027 to $57.42.
So at yesterday's closing price of $1,813.61, MercadoLibre is trading at a very rich 45.4 times this year's estimates, but a more reasonable 31.6 times next year's.
That's compared with its long-term average forward price-to-earnings (P/E) multiple of 62.3 times, as you can see in this chart:
Do MercadoLibre's growth prospects warrant such a high multiple? In the past, the answer has almost always been yes.
But going forward, there's a sharp divide among investors – and some even think the stock is a short here, as I'll discuss in tomorrow's e-mail. Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Greetings from southern Italy where I'll be cohosting the 22nd annual Value Investing Seminar with my friend Ciccio Azzollini, starting tomorrow.
My friend Glenn Tongue, my parents, and I are exploring the beautiful Puglia region. Yesterday, we walked around the beautiful coastal town of Polignano a Mare, toured the very cool (literally) Castellana Caves, and had dinner with Ciccio and his family.
Here are some pictures:
