MELI - Deep Sail Capital - MercadoLibre: Alipay + eBay + Amazon Of Latin America

2023-05-12 20:45:00 ET

Summary

• MercadoLibre is a unique company that might be best described as 1/3 Alipay, 1/3 eBay, and 1/3 Amazon of Latin America (Latam).
• Coupling the payments business with MercadoLibre's high-moat businesses in Marketplace and Logistics sets MercadoLibre up to be the backbone of commerce in Brazil, Mexico, and other Latam countries for many years to come.
• While competition has been entering their markets, specifically Amazon and Sea, MercadoLibre still sits as the sole eCommerce giant in Latam.
• Considering where MercadoLibre sits in the ecommerce ecosystem, I view their valuation as high but justified.

The following segment was excerpted from this fund letter.

MercadoLibre ( MELI )

MercadoLibre is an internet, technology, and payments company that services Latin America. MercadoLibre went public in 2007. Since the IPO, the company has grown from an eBay-like clone geared towards Latin America to a full suite of e-commerce, shops, payments, and logistics. MercadoLibre is a unique company that might be best described as 1/3 Alipay, 1/3 eBay, and 1/3 Amazon of Latin America (Latam). Aside from that, MercadoLibre is essentially Latin America's sole e-commerce and internet behemoth.

Latam has lagged the rest of the world, especially compared to North America, in terms of adoption of the internet, e-commerce, and investment in internet startup companies for the last 15 years. But that adoption has accelerated in the last 5 years. Specifically, in the last 3 years, the Latam VC landscape has exploded, with a multitude of new Latam startups emerging to service the growing internet users of the region. Many of these startups were founded by former MercadoLibre employees. I mention this to highlight the key position that MercadoLibre holds within the Latam market; it provides the payments, logistics, and credit that allow these startups to scale.

MercadoLibre's business is broken into six verticals: MercadoLibre (marketplace), Mercado Envios (logistics), Mercado Shops, Mercado Pago (payments), Mercado Credito (credits), and Mercado Ads. While the overall business is still running at extremely high growth rates (+40% yoy) even after some deceleration post-COVID, the most exciting part of the business for me is Mercado Pago, the payments segment. Mercago Pago is a payment system modeled after the successful Chinese payment system Alipay. Mercado Pago recently focused on expanding payments off the MercadoLibre exchange. It has seen its off-exchange payment volumes grow by 122% in the 3Q to $21 billion. This off-exchange payment growth is just beginning. Coupling the payments business with MercadoLibre's high-moat businesses in Marketplace and Logistics sets MercadoLibre up to be the backbone of commerce in Brazil, Mexico, and other Latam countries for many years to come.

High Quality Business Model

MercadoLibre's product segments all have adjacent network effects. If a user uses one of their products, then using a second product within MercadoLibre is more valuable for that user. For example, Mercado Logistics drives logistics revenues but also provides its Mercado Shops or Marketplaces with an easy way to ship and deliver products to customers. Mercado Pago's payments system is the interconnecting tissue that binds merchants and customers both on and off of their platform. Mercado Pago is used for not only payments but has extended into investments, savings, credit, and other financial services. Engagement in one vertical can quickly extend to other verticals, as you can see by the progression of revenues in each of their major markets and verticals over the last three years.

MercadoLibre has built its business in a similar fashion to how Amazon has built its business, but a key distinction is that MercadoLibre has been able to grow into broader verticals than Amazon. This was largely due to the lack of competition in Latam eCommerce over the last 20 years.

Outstanding Management

Marcos Galperin is the founder, chairman, and current CEO of MercadoLibre. Galperin founded the company in 1999 while attending Stanford University to get his MBA. Galperin is exactly what I look for in an outstanding manager. He has some skin in the game, as he still owns about 10% of the company through the Galperin Trust and his own equity. Dis brother is highly involved in the oversight of the company as a board member while at the same time taking no board compensation. Galperin has built a culture at MercadoLibre that is entrepreneurially driven and technology-first. Historically, Galperin has shown great skill in managing through difficult times, including through the tech bubble burst in 2000, the GFC in 2008, and extensive geopolitical stress in Latam countries over the last 20 years. He has been able to take on eBay and Amazon in Latam and remain the market leader in eCommerce. MercadoLibre has built its own logistics network in response to entrants like Amazon and Sea, which are pushing heavily into Brazil and Mexico. Outside of Galperin, the CFO, Pedro Arnt, has a long tenure with MercadoLibre. He has been with the company since 2000 and the CFO since 2011. Galperin and Arnt have a long track record of successfully executing on their stated strategy.

Substantial long-term growth prospects

MercadoLibre generates two types of revenue: commerce and fintech. Commerce is your traditional e-commerce revenues from marketplaces and product sales, while fintech revenues are from newer segments like payments, point of sale systems, financial services, and other financial products. Commerce revenues have been growing consistently in the mid-20s to mid30s since COVID started, similar to other e-commerce companies. Fintech revenue has been growing at a high rate for the last few years, around 80-100%, driven by their expansion in their payments offering. Mercado Pago's off exchange growth aligns well with the rise of the PIX system in Brazil. PIX is an electronic payments system in Brazil that allows consumers to pay directly from a bank account for all sorts of goods. For those not familiar with the Brazilian PIX system, here is a quick primer (Pix: Brazil).

While competition has been entering their markets, specifically Amazon and Sea, MercadoLibre still sits as the sole eCommerce giant in Latam. They are in the driver's seat to shape the face of eCommerce in Latam in the near term, and I expect them to continue to expand into adjacent verticals over time and leverage their central role in e-commerce to provide additional services to the next generation of Latam startups.

Reasonable Valuation

MercadoLibre has seen improving financial metrics alongside fast growth and moderating capital expenditures since the middle of 2021. 2021 was a key turning point for them, as their capex peaked after they ramped up capex to help build out their logistics network in 2018-2019. While continued investment is needed to further build out their logistics networks in other countries outside of Brazil and Mexico, I expect more cash to flow to the bottom line in the years to come as a percentage of revenue than in the last 5 years.

MercadoLibre is currently growing revenues on a FX neutral basis at 58% y-o-y, or 40% y-o-y adjusting for FX. Margins and cashflow have materially improved since they started to reduce the amount of quarterly capex spend in late 2021 (logistics-driven). Consensus estimates are currently forecasting $3.4B of EBITDA and $2.8B of EBIT in 2025. I believe those are likely conservative forecasts, but even on that basis, MercadoLibre is trading at an 18x 2025 EBITDA multiple and a 22x 2025 EBIT multiple. Considering where MercadoLibre sits in the ecommerce ecosystem, I view their valuation as high but justified.

MercadoLibre - Historical Financials

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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