1 Number MercadoLibre Investors Need to See

MercadoLibre (NASDAQ: MELI) has slumped over the last year, and it's clear why.

The company's profits have fallen as it's made investments to fend off competition and build the business for the long term.

While investors should generally want to see businesses investing for the future, the profit decline is a reasonable concern. Several Wall Street analysts have downgraded the stock on the trend. UBS lowered its rating from buy to neutral at the end of April, opining that margins will remain under pressure and only start to recover in 2027.

The biggest challenge facing MercadoLibre seems to be competition in Brazil, its biggest market and where it gets half of its revenue from. In recent years, e-commerce platforms like Amazon, Sea Limited's Shopee, and PDD Holdings' Temu have made a push into Brazil, leading MercadoLibre to respond by lowering its threshold for free shipping, offering seller incentives to retain marketplace merchants, and investing in its logistics network.

That led to currency-neutral revenue growth of 49% in the first quarter, but investors instead focused on the decline in operating income from $763 million to $611 million.

Image source: MercadoLibre.

1 reason not to fear competition

MercadoLibre has delivered strong growth for years, even in the aftermath of the pandemic, when virtually every e-commerce business was struggling.

But management shared one data point in the recent earnings report that shows that the fears about competition may be overblown. It said the average American makes 41 online purchases a year, while the average Latin American makes just seven. MercadoLibre's customers shop online slightly more at 11 times a year.

Management sees this as a huge growth opportunity, one that should have a secular tailwind as online shopping penetration grows. In that sense, competition isn't necessarily a bad thing, as encouraging more consumers to shop online could grow the pie for all e-commerce platforms.

The company also sees a similar opportunity in fintech, noting that in Mexico, more than half of the population relies on informal credit sources.

There's no guarantee that Latin America will reach U.S. levels of online shopping and credit card usage, but it's moving in that direction. As it gets easier to shop online and get credit, adoption in Latin America will grow.

That may be the best reason to invest in MercadoLibre. The company has built a large, interconnected empire in Latin America, a sprawling growth market, and will benefit from continued growth regardless of what happens with the competition.

Profits should eventually stabilize, and when they do, the stock should return to growth.

Jeremy Bowman has positions in Amazon and MercadoLibre. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool has a disclosure policy.