Three Reasons to Buy This Disruptive Growth Stock

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mercado Libre (NASDAQ: MELI), an e-commerce leader in Latin America, has a compelling business model, strong fundamentals, and plenty of growth opportunities ahead. These are three big reasons to buy this disruptive growth stock.

1. The Buisness

Mercado Libre is usually referred to as the eBay (NASDAQ: EBAY) of Latin America, and there are strong reasons to do so since eBay owns around 20% of the company – the U.S. link in Mercado Libre takes you directly to eBay - and the two companies have very similar business models.

In addition to owning a platform for matching buyers and sellers, Mercado Pago plays a similar role for Mercado Libre as PayPal does for eBay: a payment method that has been expanding beyond the platform and growing as a standalone business on its own merits. Just like eBay, Mercado Libre has been growing into other areas like advertising, classifieds and technological solutions for its clients.

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The company owns an undisputed leadership position in the Latin American e-commerce industry.  One big advantage Mercado Libre has over eBay is that it doesn´t need to compete against Amazon (NASDAQ: AMZN) that much. This allows not only for a dominant market share, but also for much higher profitability: Mercado Libre has operating margins in the area of 35%, versus 20.5% for eBay.

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Amazon is rumored to start increasing its presence in the region over the next years, and Brazil – one of Mercado Libre´s most important markets – is likely to be the starting point. This is a serious threat to watch, but Amazon won´t have it easy in Latin America. We are not talking one big country like the US, but a region with different countries, languages, currencies, and some serious difficulties like regulatory hurdles and limits to international trade.

Amazon has benefited enormously from its operating efficiencies and economies of scale in the US, but Latin America is a very different market. Mercado Libre has the first mover advantage in the region, it knows the ins and outs of doing business in different Latin American countries, and consumers are already familiar with the name.

Sooner or later Amazon will become a serious competitive threat for Mercado Libre, but the online retailer will be running from behind in a region where Mercado Libre is the undisputed leader and has much more experience and specific know how.

2. Strong Fundamentals

Mercado Libre benefits from the network effect: sellers want to go where the buyers are in order to move their merchandise quickly and at a good price. The buyers also prefer a popular platform like Mercado Libre since it offers a wide variety of choices and the safety of a trusted payment method. The more users choose Mercado Libre, the more valuable the service becomes, and this creates a virtuous cycle of growth and increased competitive strength.

The company is experiencing growing profit margins because of economies of scale. Revenue has grown faster that costs, so Mercado Libre has seen its earnings per share grow much faster than sales over the last years.

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The company is firing on all cylinders too; revenues for the last quarter of 2012 increased by a 30.9% in local currencies and 20% in US dollars. Items sold during the quarter increased by 19.5% year-over-year, while net income showed a 47.6% growth in local currencies and a 39.9% growth measured in US dollars. There is no deceleration in sight for Mercado Libre.

3. Growth Opportunities

E-commerce in Latin America has been growing at an amazing speed, and there is plenty of room for further expansion since the industry is still in its initial growth stages.

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Internet penetration is much lower than in developed countries, online shopping is only 1.5% of all retail transactions, and just 10% of the population shops online. With strong economic growth for the region, growing internet penetration and increasing popularity for online shopping, Mercado Libre is benefiting from strong secular tailwinds, which should translate into attractive growth prospects over the next years.

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Bottom Line

Mercado Libre has a fantastic business model, rock solid fundamentals and exciting growth opportunities over the long term. That´s not one, not two, but three strong reasons to place a bid for the leading e-commerce player in Latin America.

Andrés Cardenal owns shares of Mercado Libre and Amazon. The Motley Fool recommends, eBay, and MercadoLibre. The Motley Fool owns shares of, eBay, and MercadoLibre. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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