Yesterday, the US markets fell drastically. The Nasdaq, which includes the most growth stocks, fell 5%, while the S&P 500 and the Dow Jones both fell over 3%. This came after the Federal Reserve raised interest rates by another 50 basis points on Wednesday, marking the largest increase made in a single meeting since May 2000. However, there were fears among traders yesterday that there may be a 75 basis-point hike in June. This is despite the Fed Chair, Jerome Powell, explicitly ruling this out.
Fear in the markets was also caused by a series of disappointing results, including from e-commerce companies eBay and Shopify. But yesterday’s sell-off does seem slightly overdone, especially as the Nasdaq has now fallen over 20% year-to-date, and over 5% in the past year. The one stock I think is particularly tempting at these levels is the Latin American e-commerce company MercadoLibre (NASDAQ: MELI).
Trading update
After the market closed, it released a very promising trading update. Firstly, the headline figures were exceptionally strong. For instance, despite the slowdown that many e-commerce companies have been suffering in recent months, MercadoLibre managed to record Q1 revenues of $2.2bn, which was a record for the firm. This was also up around 67% year-on-year, which signals incredible growth. And in comparison to a net loss last year, it delivered net income of $65m. These are all great signs for any growth stock.
I was also very impressed that the firm managed to record gross profits of around $1.1bn, which was another record. This means gross profit margins were 47.7%, which considering the current rate of inflation, is extremely strong. These margins were aided by the fact that MercadoLibre had been able to pass on the higher costs through boosting its prices. It was also revealed that shipping costs as a percentage of total revenues continued to decline, demonstrating strong operational efficiency from the company. This bodes well for future profitability.
Fintech strength
Alongside the e-commerce business, I am very impressed with the fintech side of the business, known as MercadoPago. As banking penetration in Latin America remains low, this is an area where I feel growth can be particularly strong. Yesterday’s trading also highlighted the fintech sector as an area for growth. Indeed, in Q1, MercadoLibre ended with a credit portfolio of $2.4bn. This is far higher than the $1.7bn at the end of 2021. There are also plans to expand the company’s buy-now, pay-later service, called MercadoCredito.
There are risks, however. For example, the current macroeconomic environment is very challenging, especially as higher interest rates may increase the cost of servicing its large debt pile. Further, there are worries that consumer spending may decrease, as inflation continues to bite.
What am I doing with this growth stock?
Although I’m wary about buying e-commerce companies now, due to their slowing growth after the pandemic, I feel that MercadoLibre is unique. Its revenue growth has remained excellent, and profit margins have also held up well. For me, this distinguishes the e-commerce firm from other growth stocks. Therefore, I’m tempted to add more of the shares to my portfolio after the Q1 trading update.