Free market (NASDAQ:MELI) is often compared to Amazon for its success in the e-commerce market. Its orientation towards Latin America, with its developing markets with attractive prospects, has made it an interesting growth stock to hold.
And over the past five years, the stock’s 150% return has outpaced Amazon, which is up about 97% over the same period.
But some investors might worry that MercadoLibre has become too expensive. It trades at more than 70 times earnings, which can be a difficult valuation to accept, especially as fears grow that the stock market will overheat this year as share prices rise. S&P500 continues to soar towards new records.
Why MercadoLibre Stock Looks Expensive
The problem with just looking at one price/earnings ratio The P/E multiple only indicates the value of a stock based on its earnings over the past four quarters. If a company had a bad quarter or incurred an unexpected expense, it would impact these numbers.
In other cases, a company may be growing rapidly and generating a lot of optimism in the markets, but its margins are not high enough to prevent the earnings multiple from rising too quickly.
MercadoLibre falls into the latter category. While revenue and stock price took off, bottom line grew at a slower pace.
Over the past 12 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 it succeeds, that means more of each new revenue dollar will flow through to the bottom line.
Investors should not overlook promising growth potential
For growth investors, an important metric to consider is the price/earnings/growth ratio (PEG). It takes into account the price-earnings ratio as well as the growth expected by the company’s analysts in the future (usually the next five years).
And based on its PEG ratio of less than 1.5, MercadoLibre’s stock may seem a little expensive, but not by much. Normally, growth investors view a PEG of 1.0 as the line between a good growth stock and an expensive stock. The lower the PEG, the better the purchase. Although MercadoLibre is above this threshold, it is not significantly higher.
In the very long term, the company could still gain in value. It is a growing company, present in 18 countries and with 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 shares?
MercadoLibre may be a good option to consider for growing investors today. While its price may seem high right now, it’s important to always consider where the company might be in a year or two, but also 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, the profits could be significant for investors willing to be patient and stay the course. The stock can 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 has positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.
Why MercadoLibre stock is cheaper than it seems was originally published by The Motley Fool
