By the summer of last year, the valuation of nearly every growth stock had reached ridiculous levels. Such speculation was unsustainable, and many of these stocks have since endured a brutal sell-off.
However, I think the market has a tendency to overshoot one way or the other. It is over-optimistic as it rises, then overly pessimistic as it falls.
Here’s one stock – held in the portfolio of Scottish Mortgage Investment Trust (LSE: SMT) – which I think has been oversold. This could offer me a great buying opportunity.
Leader in Latin America
MercadoLibre (NASDAQ: MELI) has been dubbed ‘The Amazon of Latin America’, due to its dominance in e-commerce across the region. In reality though, it’s more like Amazon combined with PayPal and eBay.
The company has built an e-commerce and payments ecosystem across 18 countries in Latin America. This is an area which has so far been relatively slow to adopt online shopping.
But that is changing. Because according to Morgan Stanley, e-commerce penetration in Latin America is expected to double from 8% in 2021 to 16% in 2025.
And MercadoLibre has certainly been taking advantage of this shift to the digital world. Between 2016 and 2021, MercadoLibre’s annual revenue rose from $844m to $7.07bn, representing a compound annual growth rate (CAGR) of 53%.
Digital payments growth
MercadoLibre’s fintech business, Mercado Pago, has been a big contributor to this growth in recent years. The payment platform now has 41.6m active users, compared to 31.6m just one year ago. Considering there are 650m people in Latin America, the untapped potential here remains immense.
Importantly, this growth in digital payments is also coming from outside the e-commerce platform. In fact, in the third quarter of this year, off-platform total payment volume rose 122% year on year. Off-platform use now represents 72% of total payment volume ($32.2bn), up 76.4% over last year.
This means consumers are using Mercado Pago to buy groceries, borrow money, send and receive cash, pay bills, and much else. The data the company is collecting from all these transactions gives it a powerful and growing competitive advantage.
MercadoLibre is essentially building the digital payments infrastructure for an entire continent.
Risk
This growth explains why MercadoLibre has become a top 10 position in Scottish Mortgage’s portfolio recently. In fact, it now represents 2.9% of total assets, with an equal weighting to Amazon.
That’s not to say I don’t see any risks with the stock. One is that the currencies of Latin America can often be extremely turbulent. This can cause volatility in MercadoLibre’s earnings and in the share price.
However, the e-commerce giant has been around since 1999, with founder Marcos Galperin still at the helm as CEO. That means he and his management team have come through many political and currency crises over the last two decades.
Indeed, Scottish Mortgage have said of MercadoLibre: “Its time horizon is the next 15 years, not just the next three or four. It wants to build a legacy”.
I believe the company has a very long runway of growth ahead of it. I’ve owned this stock for a few years now. But with the shares down 37% over the last year, I’m ready to add to my position as soon as I’m able to.
