Why I Own This Amazing Growth Stock

By Markets Fool.com

Image source: Getty Images.

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MercadoLibre is the leading e-commerce player in Latin America. The business model is remarkably profitable, and the company has enormous room for expansion over the long term. Economic volatility in the region can make financial performance hard to predict on a quarterly basis, but short-term volatility is no reason for concern, since I'm planning to hold on to my MercadoLibre shares for years to come.

A time machine for investors

What if you could use an investing time machine to buy companies likeeBay , PayPal Holdings, and Amazon.com a decade or two ago? That's a no-brainer proposition: most investors would embrace such a spectacular opportunity.

Unfortunately, there is no investing time machine commercially available (as of the time of this writing), but investing in MercadoLibre nowadays is as close as it gets to buying these three powerful growth companies when they were still much younger and had enormous room for expansion ahead.

MercadoLibre is usually called "the eBay of Latin America," and for good reasons. To begin with, eBay is a major shareholder in MercadoLibre, as it owns nearly 18% of MercadoLibre's capital. Also, the two companies have fairly similar business models: Both eBay and MercadoLibre operate as e-commerce facilitators, matching buyers and sellers of all kinds of products and making commissions on every transaction.

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MercadoLibre owns a digital payments platform called MercadoPago, and it plays a similar role to what PayPal used to do for eBay, before the two companies were separated via a spinoff last year. MercadoPago is a popular payment method in MercadoLibre's marketplace platform, and it's also expanding beyond MercadoLibre as a promising growth business on its own merits.

There is one big difference between eBay and MercadoLibre, though. While eBay comes considerably behind Amazon in terms of size and growth in the U.S., MercadoLibre is the undisputed e-commerce leader in all of its main markets. This allows MercadoLibre to fully capitalize on booming e-commerce demand in Latin America, offering tremendous potential for growth over the years ahead.

The size of the opportunity

The population of Latin America is nearly 627 million people -- almost double the current population of the U.S. Internet penetration is also significantly lower, at around 56% versus 88.5% in the United States. Nearly 9.9% of all retail sales in the U.S. are estimated to happen online in 2016, while the number is a much lower 3% in Latin America.

Considering these statistics in conjunction, it's easy to see that MercadoLibre offers massive potential for growth as the leading e-commerce player in Latin America.

The following table compares MercadoLibre to Amazon, eBay, and Paypal in terms of two illustrative variables: forecast sales during 2016, and current market value as measured by market capitalization. The numbers are quite clear: investors in MercadoLibre stand to benefit substantially if management can capitalize effectivelyon the company's potential.

Company Estimated Revenue 2016 Market Capitalization
MercadoLibre $752 million $5.9 billion
Amazon $134.2 billion $332.6 billion
eBay $8.8 billion $27.3 billion
PayPal $10.7 billion $44.5 billion

Data source: Yahoo! Finance.

Firing on all cylinders

Currency volatility and economic uncertainty in countries such as Brazil, Argentina, and Venezuela can make financial performance unstable in the short term. Though macroeconomic considerationsshould definitely be taken into account when considering this stock, MercadoLibre's business is clearly booming.

Net revenue during the first quarter of 2016 amounted to $157.6 million, a year-over-year increase of 6.4% in U.S. dollars and a much stronger jump of 75% in local currencies. Gross profit margin in constant currency was 67.4% of revenue, and MercadoLibre retained 24.4% of sales as operating margin on a constant currency basis during the quarter. Not only is the company producing explosive growth, but the business model is also extraordinarily profitable.

Due to elevated inflation levels and currency volatility in MercadoLibre's main markets, financial performance in monetary terms is hard to evaluate, but operating metrics are not affected by these factors, and they are painting a remarkably promising picture for investors in the company.

MercadoLibre ended the first quarter of 2016 with 151.5 million users on its platform, a vigorous increase of 19.6%. Items sold amounted to 38.3 million during the period, increasing by 39.4% versus the first quarter in 2015. Total payment transactions grew by a staggering 85.5% year over year, to 27.5 million. MercadoLibre is borrowing a page from Amazon's playbook and building its own shipping platform, MercadoEnvios. Total items shipped through MercadoEnvios grew 114% year over year to 17.2 million units during the quarter.

Economic conditions in Latin America are hard to predict, and that's a major risk factor to keep in mind. Nevertheless, MercadoLibre offers extraordinary potential for growth, and the company is effectively capitalizing on its opportunities while delivering rapidly growing sales and rock-solid profitability. For this reason, I believe MercadoLibre is an amazing growth stock to hold for the long term.

The article Why I Own This Amazing Growth Stock originally appeared on Fool.com.

Andrs Cardenal owns shares of Amazon.com and MercadoLibre. The Motley Fool owns shares of and recommends Amazon.com, eBay, MercadoLibre, and PayPal Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.