MercadoLibre: An Evaluation of Intrinsic Value

• Using a two-stage approach to free cash flow for equity, we estimate MercadoLibre’s value at approximately USD 2,668.

• The current share price of USD 2,501 suggests that it’s quite close to this estimated fair value.

• Our fair value estimate is about 7.7% lower than the analyst’s target price of USD 2,890.

To assess MercadoLibre, Inc. (NASDAQ: MELI), we employed a discounted cash flow (DCF) model that calculates the company’s future cash flow and brings it to present value. At first glance, this might seem quite intricate, but it’s really quite manageable.

It’s important to note that while DCF is a useful tool, it’s not universally applicable, as there are various ways to value a company. For those interested in fair value analysis, you might find the analysis model useful for deeper insights.

We utilize a two-stage growth model, which takes into account two growth phases for the business. Initially, the growth rate is usually more vigorous, and later it stabilizes. The first step is to project cash flow for the next decade. Ideally, this should rely on analyst estimates, but if that’s not feasible, you can extrapolate from historical free cash flows. Companies with dwindling cash flows tend to see their rate of contraction slow, whereas those with increasing cash flows may experience a deceleration in growth. Children’s growth patterns can serve as a reminder that early stages tend to grow slower than later ones.

The fundamental concept of DCF is simple: a dollar today is worth more than a dollar in the future, prompting a discounting of future cash flows to derive a present value estimation.

(“est” indicates the growth rate based on estimates from Wall Street)
Current value of 10-year cash flow (PVCF) = USD 6.6 billion

After determining the present value of those cash flows for the first decade, the next step involves calculating a terminal value, which accounts for cash flows beyond that initial stage. Generally, conservative growth rates predominate and shouldn’t surpass national GDP growth rates. We estimated future growth using a 5-year average of 10-year government bonds (3.1%). Like the growth period, future cash flows use an 11% discount rate for present value assessment.

Terminal Value (TV) = FCF₂₀₃₅ ×(1 + g) ÷(r – g) = USD 1.4 billion ×(1 + 3.1%) ÷(11% – 3.1%) = USD 191 billion

Current Value of Terminal Value (PVTV) = TV /(1 + r)¹⁰ = USD 191 billion ÷ (1 + 11%)¹⁰ = USD 69 billion

Adding together the cash flows and discounting the terminal value yields a total valuation of USD 13.5 billion for the stock. Dividing this total by the number of shares results in an intrinsic value per share that suggests the stock is fair valued at a 6.2% discount compared to its current price of USD 2,501. It’s worth mentioning that this is just a preliminary estimate and, like any complex calculation, it has its pitfalls.

It’s essential to realize that key factors affecting discounted cash flow include the discount rate and actual cash flows. If you disagree with our findings, it might be beneficial to perform your own calculations with your assumptions. DCF does not provide a complete picture—it overlooks industry cyclicality and future capital needs. In our assessment of MercadoLibre, we utilized its cost of equity as the discount rate, which was approximated at 11% based on a levered beta of 1.158. This beta reflects stock volatility compared to the overall market, derived from the industry average of comparable firms, typically ranging from 0.8 to 2.0—a reasonable scope for stable businesses.

Considerations:

• Risk: Take note that MercadoLibre shows one warning sign in our investment assessment.
• Future Revenue: Comparing MELI’s growth to its peers and the broader market is crucial. We recommend exploring analyst consensus for upcoming years.
• Other High-Quality Alternatives: If you’re interested in solid all-around options, check out a curated list of high-quality stocks.

Simply Wall Street conducts daily discounted cash flow evaluations on all NasdaqGS stocks. If you’re curious about other stock evaluations, you may search for them easily.

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