MELI - MercadoLibre: A Deep Dive Into Latin America's E-Commerce Giant

2023-08-16 22:46:10 ET

Summary

• MercadoLibre is a key player in online sales in Latin America, with a user base of 148 million.
• The company has expanded beyond e-commerce to include logistics, advertising, payments, credit, and insurance.
• MercadoLibre's revenues have been growing rapidly, and its valuation is justified despite economic challenges in the region.

MercadoLibre ( MELI ), often dubbed the "Amazon ( AMZN ) of Latin America." Sounds familiar? In this article, we'll delve into the prospects of this company and evaluate its current investment potential.

The Business of MELI

Founded in 1999 in Argentina, MercadoLibre has been a key player in online sales for over two decades. Recently, the company's user base has seen impressive growth, reaching 148M users in 2023. To put that into perspective, according to one of the company's presentations, if those users were a country, it would be the second largest in Latin America.

At its core, MercadoLibre is an e-commerce giant. Yet, akin to Amazon, it has expanded from its initial platform to embrace several adjacent sectors, including logistics, advertising, payments, credit, insurance, and more. We'll explore some of these areas in the coming sections.

In the second quarter of 2023, MercadoLibre witnessed an astounding 41 purchases per second. With 3.2 million sellers on its platform, they reached 47.5 million unique buyers, resulting in a total of $10.5B in merchandise sales. Notably, through MercadoLibre's logistics platform, 56% of these shipments were delivered within 24 hours.

Mercado Pago, their payments platform, recorded 271 transactions per second during the same quarter. These transactions involved 45.3 million unique users, culminating in over $42B in payment volume. Within this framework, MercadoLibre maintains a $3.2B credit portfolio, all underwritten by their advanced in-house technology.

The myriad of services offered, coupled with their swift growth, has propelled MercadoLibre's revenues skyward, resembling the sharp incline of a hockey stick. The company's 10-year revenue chart, displayed above, is a testament to its flourishing trajectory.

Certainly, due to this exponential growth, MercadoLibre's valuation might appear steep in some metrics. However, many would argue this valuation is justified, even with the backdrop of a decelerating economic landscape across Latin America.

A Look at Growth Visually

The impressive growth in revenue is evident, but it's essential to delve deeper into the income statement to truly comprehend the foundation of this business.

Four critical areas stand out that investors should monitor. MercadoLibre regards these aspects as their Key Performance Indicators (KPIs), ensuring they consistently occupy a prominent position in investor reports.

First on the list is GMV, or Gross Merchandise Volume. This represents the total value of goods exchanged on the platform. A glance at its trajectory over the past few years reveals a commendable growth rate.

The second quarter of 2023 marked a milestone for GMV, as it reached $10.5B. This was the inaugural quarter where the company exceeded the $10B mark, achieving this with a 47% year-on-year FX-neutral growth rate.

Turning our attention to the number of items sold, we see a trajectory mirroring GMV's. In the second quarter of 2023, 325.3M items were transacted, compared to 275.2M the previous year, indicating a growth of 18.2%.

The TPV, or Total Payments Volume, chart provides insights into the growth of Mercado Pago, MercadoLibre's payment platform. Though the company segregates this metric into on/off network transactions, I prefer to view it holistically. And what we see is a chart that's nothing short of remarkable.

In the span of a year, there's been a 39.4% surge in volumes, with recent figures indicating an uptick in growth momentum.

Lastly, we'll inspect the company's credit portfolio. Though we're working with a more limited data set here, it still boasts a 22% year-on-year growth.

A deeper dive reveals that this credit portfolio comprises merchant credit ($707M), consumer credit ($1.795B), and credit cards ($748M). The growth in merchant credit lags at 2.5%, while consumer and credit card segments are surging at 21.9% and 42.5%, respectively.

What do these entail? Merchant credit aids businesses on MercadoLibre, assisting them in purchasing inventory, meeting payroll, and other essential operations. The "Consumer" segment is analogous to a buy-now-pay-later model, and credit cards require no further elaboration.

Primarily, MercadoLibre underwrites this credit portfolio, leveraging data from its extensive sales and transaction network.

The above slide offers a comprehensive overview, encapsulating all the metrics we've discussed and more. This was presented by the company during their second quarter earnings call. For those interested, you can access the slides here.

Valuation

With coverage from 12 analysts, MELI's average share price target stands at $1,600, marking a 23% increase from its current value.

JP Morgan has spotlighted the company as their top tech pick . Following this recognition, JP Morgan elevated its price target for MELI to $2,000, suggesting a potential 53.8% increase if the stock reaches this valuation.

It's noteworthy that MELI refrains from providing financial forecasts, leaving us without any official guidance in this context.

Historically, in terms of comparable metrics, MELI currently stands at its most "affordable". I use quotation marks intentionally because, despite this, the company's stock continues to trade at a rate many would deem a premium in the retail domain.

This prompts the question: Is the anticipated 24% CAGR through FY25 worth the investment today? My inclination is to respond affirmatively, especially if one's intention is to diversify beyond the American market.

With its vast potential, Latin America represents a fertile ground, and MELI is only in the early stages of tapping into it. The expansive logistics network established by the company promises substantial returns in the foreseeable future.

If the projected 24% CAGR materializes – and there's ample reason to be optimistic given MELI's expansive reach and market dynamics – we could anticipate revenues ranging between $21-23B in FY25. Factoring in heightened efficiencies (evidenced by ongoing trends) and augmented margins from fintech ventures, MELI's net income for FY25 might surge to $1.65B, more than doubling its current figure.

Re-evaluating these figures, the valuation approximates to 30-35x the projected FY25 EPS. While this might not scream "immediate buy", it's certainly an appealing proposition for a company with such robust growth prospects.

Statista Market Insights indicates that e-commerce penetration in Latin America remains relatively low. Such data bolsters the argument for those considering a long-term investment in the sector, aligning with my perception of MELI as a promising long-term asset.

Risks

Investing in MELI is not without its challenges. As previously discussed, there's the matter of valuation. Additionally, and perhaps more pressing in the immediate future, are the looming concerns regarding decelerating growth within the region. Economic slowdowns can influence consumer behavior, potentially affecting e-commerce transactions and the overall health of businesses operating in the space. Investors must weigh these factors alongside the company's strengths and growth potential when making decisions.

The United Nations regional commission estimates that all of the subregions will experience lower growth in 2023 versus 2022. South America will grow by 0.6% in 2023 (versus 3.8% in 2022); the group made up of Central America and Mexico will expand by 2.0% (in comparison with 3.5% in 2022); and the Caribbean (without including Guyana) will grow by 3.5% (in comparison with 5.8% in 2022). Quote: cepal.org

Indeed, while challenges persist, it's essential to acknowledge the silver linings. Growth, even if moderated, is always preferable to contraction. MELI's broad operational footprint across the region offers a cushion against localized downturns. The slower 0.6% growth in South America is counterbalanced by the more robust 3.1% expansion in Central America, placing MELI in a favorable position.

The company's credit portfolio does raise eyebrows. While in-house underwriting, backed by their vast data, seems promising, its resilience during economic downturns remains untested. How MELI's underwriting strategies fare during challenging times will be a true testament to their efficacy.

However, the company's diversified approach serves as a robust counterargument to these concerns. With a broad geographical presence and a diverse clientele spanning consumers, credit card users, and merchants, MELI has multiple pillars supporting its operations.

The surge in debt is another point of contention. A company that once prided itself on a streamlined balance sheet now grapples with a debt escalation from $1B in 2019 to $5.5B presently.

While this figure isn't astronomical in the grand scheme of things, it's a deviation from MELI's traditional financial prudence. Investors and stakeholders should keep a watchful eye on this development, ensuring that the borrowed capital is deployed judiciously to fuel growth and innovation.

Closing Thoughts

MercadoLibre presents a compelling opportunity for investors keen on diversifying their portfolio with a slice of the South and Central American e-commerce market. Although the company's current valuation leans on the higher side, its expansive fulfillment infrastructure across the nations it serves, combined with the vast untapped potential of e-commerce in the region, hint at promising growth prospects.

I'm inclined towards acquiring shares below the $1,300 mark for long-term holdings, but I advocate for a measured approach in building up a stake in MELI. For those mulling over an investment, a gradual entry strategy might be wise. Given the tech sector's dynamics, patient investors might find ample opportunities to bolster their position, particularly if the broader tech landscape faces headwinds.

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