After soaring in value in 2020, 2021 has been far less pretty for many growth stocks. This is certainly true for MercadoLibre (NASDAQ: MELI), which has seen a fall of over 27% so far this year. This is mainly due to fears that e-commerce growth will start to die down after the pandemic, and inflationary pressures. Although these are both risks, the Latin American company has continued to perform excellently, and I believe that it’s now oversold. As such, for the following reasons I feel it has the potential to double in value.
Excellent business performance
MercadoLibre has gone from strength to strength over the past few years, and the pandemic has helped accelerate growth. For example, in 2020, the company recorded revenues of $3.97bn, which was a 73% increase from the previous year. The company has built on this excellent performance in 2021, and after reporting revenues of $1.97bn in the third quarter, a 73% year-on-year rise, annual revenues are forecast to reach close to $7bn. I am also hoping the company gets a Christmas boost.
Such strong revenue growth has partially been reflected in the MercadoLibre share price. Indeed, since the start of 2020, the shares have risen nearly 100%. But at the same time, revenues have also risen around 230%, and it has managed to reach profitability. From this standpoint, the company’s growth is higher than the share price rise. This is a sign to me that the shares are too cheap and offers me evidence that this growth stock may even be able to double in value over the next year.
Valuation
The next indication that this growth stock could double in value is from its lower valuation than other companies in the e-commerce market. In many ways, this may seem odd, because MercadoLibre does seem fairly expensive on a pure valuation perspective. For example, it has a price-to-earnings ratio of around 300, far higher than the majority of other companies. But the firm has always prioritised growth over profits, and this has included significant investment into itself. As such, I’m not worried about such a high P/E ratio, as profits seem likely to grow from this point.
Secondly, due to its focus on growing revenues, it currently trades on a price-to-sales ratio of under 10. This can be compared to Shopify, the Canadian e-commerce firm, which has a P/S ratio of around 30. Both are seeing revenue growth at similar rates. As such, while I believe that Shopify is slightly overpriced, if MercadoLibre was to reach a similar valuation, it indicates that it could triple in value. Shopify also has a very similar P/E ratio. For me, this is evidence that MercadoLibre is underpriced, and could double in value next year.
What am I doing with this growth stock?
I already own MercadoLibre shares, and it currently makes up the top position in my portfolio. Although I worry about the risks of inflation, which has seen many growth stocks lose significant value, I feel like this is a short-term issue. With e-commerce still a largely unpenetrated market in Latin America, and MercadoLibre leading the way at the moment, I’m therefore optimistic. I will continue to add MercadoLibre shares at its current price.
