Growth stocks have been beaten down recently, as inflation has been soaring. Inflation is particularly damaging to growth stocks for two main reasons. Firstly, these high-growth companies gain a lot of their value from predicted future cash flows. High rates of inflation see the value of these future cash flows decrease. Furthermore, rising inflation is often met with interest rate hikes, as has already been seen in the US and the UK. Higher interest rates increase borrowing costs, which can stunt growth. Even so, Warren Buffett has previously stated that “whether we’re talking about stocks or socks, I like buying quality merchandise when it’s marked down”. I’m following this advice and buying this high-quality and high-growth Latin American e-commerce firm.
What company is it?
MercadoLibre (NASDAQ: MELI) has managed to deliver consistent growth over the past few years. Indeed, while in 2019 it reported revenues of around $2.3bn, last year it recorded revenues of $7bn. At the same time, it has managed to reach profitability. This incredible growth represents the quality that Warren Buffett refers to.
Such strong revenue growth has been enabled by its diversification. For example, alongside its established e-commerce sector, it also has an expanding fintech sector. In the fourth quarter of 2021, its fintech ops saw revenues of $773m, a 70% increase year-on-year. Banking penetration remains fairly low in Latin America, so I see significant potential in here.
I also feel that revenues can increase further in 2022. In fact, the group has committed to around $3.44bn of investment in Brazil, which is a 70% year-on-year rise. Investments in Mexico will also be lifted to around $1.5bn. Although this will see costs soar, and may lead to an operating loss, it means that the high growth should be able to continue. This cements MercadoLibre as one of my favourite growth stocks.
The risks
MercadoLibre has lost significant amounts of value recently and is down around 40% from its highs last September. This is one reason why I believe that Warren Buffett might be interested in such a stock, because it represents value. But this recent fall does highlight many of the risks associated with the company.
For example, as it operates in Latin America, it is subject to some political instability. Argentina is an example, because the country has seen hyperinflation over the past few years, and this has caused currency losses for MercadoLibre. This may disrupt its growth plans. Further, now that the pandemic is mainly subsiding, e-commerce may start to decline in popularity.
Why am I still buying this growth stock?
Despite these risks, I believe that the recent sell-off has been slightly overdone. Indeed, it now has a price-to-sales ratio of around 8, whereas historically it has traded with price-to-sales ratios of over 20. Considering the company’s excellent growth rates, which are showing no signs of slowing down, I feel this is too cheap. I’m continuing to buy this high-potential growth stock.