Stock Split Watch: Is This Ecommerce and Fintech Pioneer Next?

A number of tech’s brightest stars have made headlines over the past couple of years by announcing stock splits. Tesla, Amazon, Alphabetand Shopify jumped on the wave in 2022, and followed in the footsteps of apple, The trading deskand Nvidiawhich paired their shares in 2021. Investors have been captivated by stock splits, resulting in renewed attention to the companies that do them.

A disruptive company that may soon join the ranks of the share-sharing elite is e-commerce pioneers MercadoLibre (MELI -4.83%). Since going public in 2007, the stock has gained a remarkable 3,270% — and that’s even after the recent meltdown in tech stocks. While that doesn’t change the company’s robust fundamentals, there is one compelling reason why a stock split might make sense in this case.

A primer for this market leader

MercadoLibre is a pioneer in its field and may be one of the most successful companies most investors have never heard of – so a brief primer may be in order.

The e-commerce company was founded in 2007 and was quickly named “eBay of Latin America,” as it promoted the sale of goods between consumers. MercadoLibre, however, developed rapidly and has drawn comparisons with many other successful competitors. The company offers a variety of tools that facilitate e-commerce and payments. It provides e-commerce, shipping and fulfillment solutions that rival Amazon, website building tools similar to Shopify, and a payment solution modeled after it PayPal. In fact, PayPal was so impressed with MercadoLibre’s fintech that it took a $750 million stake in the company.

Its success has helped MercadoLibre become the market-leading e-commerce and fintech company in each of the major markets in which it operates—even beating Amazon. However, it was the company’s foray into payments that really took off. In the second quarter, total payment volume of $30 billion grew 84% year-over-year, driven by off-platform transactions (made by other brick-and-mortar and online retailers) of $21.2 billion, an increase of 135%.

Why a stock split can make sense

When a company goes through a stock split, it doesn’t change anything about the fundamentals of the business, at least not in any real sense. From a mathematical point of view, the market value is the same; it is only the share price and the number of shares that change – always in direct correlation to each other. For example, if the company were to adopt a 10-for-1 stock split, for each share of MercadoLibre stock held by investors – currently trading at approximately $920 per share – after the split, shareholders would own 10 shares worth $92 each (10 x $92) = $920 ). So the overall value of the investment does not change.

On a psychological level, however, the impact is a bit more unclear. A stock split tends to communicate to shareholders that management is confident that the business – and ultimately the stock price – will continue to grow. This vote of confidence generally tends to build excitement in the investment community, making potential shareholders more positive about the company’s prospects. That is, of course, as long as the business has grown well and management has a history of executing on a well-developed vision.

In the case of MercadoLibre, however, there’s another reason why a stock split might make sense. The shares are currently trading near $1,000 each, but late last year, before the tech rout, the stock was selling in excess of $1,900 per share. In either case, a stock price of that magnitude could put the stocks out of reach for the average retail investor, especially those with less than $1,000 to invest at a time. While some brokerages offer fractional share trading, beginners may still be intimidated by the high price tag.

Fuel for the climb

MercadoLibre stock is currently down 50% from its highs reached late last year, a result of the ongoing bear market. But a look at the company’s recent results suggests that it won’t be long before the stock scales new highs. In the second quarter, revenue hit a new quarterly record of $2.6 billion, up 57% year-over-year in local currencies. This was driven by e-commerce revenue of $1.4 billion, up 26%, while payment revenue of $1.2 billion rose 107%.

Other metrics testify to the strength of MercadoLibre’s business. Gross merchandise volume – or the value of products sold on the platform – reached $8.6 billion, up 26% year-on-year, while total payment volume of $30 billion rose 84%.

Given the consistent and robust growth of its business — especially in the face of macroeconomic headwinds — investors should seriously consider buying shares of MercadoLibre stock, even if the company is not it the next to adopt a share split.