Investors always anticipate Warren Buffett’s stock picks. His holding company, Berkshire Hathaway, has beaten the market by a wide margin over its decades, and his sound advice and deep wisdom have guided many an investor toward success.
But he doesn’t always get everything right, and he’ll be the first to admit his mistakes. He has famously said that he missed the opportunity to buy Amazon in its early stages and benefit from its run-up, but Berkshire Hathaway finally bought shares in 2019.
According to its most recent quarterly filing, Berkshire Hathaway only bought one new stock in the 2024 first quarter, insurance company Chubb. Buffett looks for undervalued stocks, and he doesn’t see too many opportunities right now. At the same time, with high interest rates, it’s a good time to save cash for better opportunities that might come up.
What stock might be next on Buffett’s list? MercadoLibre (NASDAQ: MELI) fits the bill. Here’s why.
“Long-term competitive advantage in a stable industry”
That’s a direct quote from a Berkshire Hathaway shareholder letter and the basis of what Buffett looks for when buying stock or a full company. The examples he gives are being a low-cost producer, like Geico, which is a fully owned Berkshire Hathaway subsidiary, or Costco Wholesale, which it once invested in but has since sold off, or having a global brand, like Coca-Cola and American Express, two of his favorite stocks.
MercadoLibre’s moat is its excessive dominance in an underpenetrated but growing market. It has a sizable lead in Latin America over global e-commerce giants Alibaba and Amazon, and has no major local competition. MercadoLibre is the established leader in e-commerce, and it continues to widen its moat by improving shipping and delivery options. In MercadoLibre’s first quarter of 2024, 76% of all orders were delivered within 48 hours.
MercadoLibre also benefits from a host of growth drivers. It operates in a region with some of the lowest e-commerce penetration rates in the world and some of the highest e-commerce growth rates in the world. It benefits from strong network effects, where more suppliers get onto the platform as there are more buyers, leading to more buyers, higher engagement, more data, and a better platform. The company just launched Meli+, a membership program similar to Amazon Prime, and is still in the early stages of leveraging its value proposition.
Favorable long-term economics
Buffett describes four goals he has for Berkshire Hathaway. One of them is “acquiring and developing new and varied streams of earnings.” Elsewhere, he explains that Berkshire Hathaway will take the “lush earnings” from the truly distinctive and outstanding companies it invests in and buy similar outstanding companies.
MercadoLibre has similar goals and runs its businesses according to a similar model. What began as an e-commerce venture has transformed into a formidable fintech empire. MercadoLibre first launched Mercado Pago, its digital wallet, as a way for underbanked customers to access the platform and be able to pay for purchases.
It has grown into a full digital financial business and includes digital payments, credit cards, and loans. There are nearly 20 million credit users with cost to serve at less than $1, and it has the most monthly active users of any fintech company in some of its main markets. These are the kinds of favorable long-term economics that Buffett seeks.
Like Amazon and Berkshire Hathaway, MercadoLibre counts on its core revenue-generating business for reliable money coming in and uses its vast funds to get into new, higher-growth projects.
Buffett likes banks
With its shift into finance, MercadoLibre is becoming more like the kind of financial company Buffett tends to invest in. He has banks and financial companies disproportionately in Berkshire Hathaway’s portfolio because they have lots of cash and typically have higher margins. They also support and grow with the economy, which Buffett sees as key to any company that will be around for a long time.
Buffett is already an investor in Nu Holdings, another Latin American digital finance powerhouse. Buying shares of MercadoLibre would be another bet on the rise of digital finance in the region, with a twist. Buffett tends to make his bets through several companies — American Express, Visa, and Mastercard, and several banks that compete against each other.
Is it a good value?
Buffett always looks for a good deal, but that’s only relative to the business. One of his most famous quotes is that “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
MercadoLibre is a wonderful company, and its stock looks like it’s trading at a fair price. It trades at a price-to-sales ratio of 5.5 and a price-to-earnings ratio of about 76, which is much more expensive than Amazon. However, it’s growing at much higher rates, and it’s just becoming reliably profitable.
Buffett, with his focus on cash, might look more carefully at its price-to-free cash flow, which is only 18 vs. 42 for Amazon.
MercadoLibre could show up in Berkshire Hathaway’s portfolio sometime soon, and it’s a company any individual investor should consider if they’re looking for excellent growth stocks.
Should you invest $1,000 in MercadoLibre right now?
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American Express is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has positions in American Express, MercadoLibre, and Nu Holdings. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, Costco Wholesale, Mastercard, MercadoLibre, and Visa. The Motley Fool recommends Alibaba Group and Nu Holdings and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
Is This the Next Stock Buffett Could Buy? was originally published by The Motley Fool
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