MELI - MercadoLibre: A Hold Given Current Valuation

2023-10-12 08:01:57 ET

Summary

• MercadoLibre benefits as Latin America's e-commerce grows.
• MELI leads in Latin American e-commerce, outperforming global competitors with local expertise.
• My DCF analysis suggests 9% returns, but valuing high-growth firms like it carries inherent risks.

Investment Thesis

In my view, MercadoLibre (MELI) has effectively carved a niche for itself in Latin America's e-commerce sector. As online commerce gains momentum in the region, MercadoLibre's understanding of local nuances has positioned it ahead of many global competitors. However, when evaluating its investment potential, a measured approach is essential. A discounted cash flow analysis suggests potential returns of around 9% in the next five years. But valuing high-growth companies like MercadoLibre isn't straightforward. The unpredictable nature of such firms can lead to varied projections. While I respect the company's growth and leadership, I believe investors should be aware of the challenges in assessing the value of rapidly growing companies, especially in fluctuating markets.

I believe MercadoLibre stock is a hold due to its strong market position in Latin America and its consistent growth trajectory. However, the inherent risks associated with high-growth companies in volatile markets should be considered, making it prudent for investors to adopt a wait-and-see approach before making further investment decisions.

Company Overview

MercadoLibre, stands out as the premier e-commerce platform in Latin America, with a strong presence in countries like Argentina, Brazil, Mexico, and Colombia. Established in 1999, it provides a platform reminiscent of eBay ( EBAY ) and Amazon ( AMZN ), where users can seamlessly buy and sell a plethora of items. In my opinion, what sets MercadoLibre apart is its ability to adapt and diversify. This is evident in their expansion into digital payment with Mercado Pago and their logistics arm, Mercado Envíos. Their revenue model, in my view, is strategically designed, capitalizing on listing fees, advertising, and payment processing. While they've encountered stiff competition from global powerhouses like Amazon and Alibaba ( BABA ), and even regional players, MercadoLibre's deep-rooted understanding of local nuances and consumer behavior has, in my opinion, cemented its dominance in the Latin American e-commerce landscape.

Latin America's E-commerce Boom

E-commerce sales in Latin America are on the rise, offering opportunities for platforms like MercadoLibre. According to Statista , Brazil and Mexico, MELI's primary markets, are set to nearly double their e-commerce sales revenue by 2025, with projections of $79 billion and $63 billion respectively. Other countries, including Argentina, Chile, Colombia, and Peru, are also expected to see significant growth in their e-commerce sectors by 2025. This growth benefits MELI, strengthening its position in the market.

The growth in Latin American e-commerce can be linked to several factors. Internet penetration and smartphone use are increasing, making online shopping more common. The younger demographic is tech-savvy and leans towards online shopping. Improved infrastructure, especially in logistics and payment methods, builds trust in online transactions. The COVID-19 pandemic pushed many towards online platforms due to safety concerns. Additionally, the presence of global e-commerce players in the region has encouraged local platforms to innovate, creating a competitive market that drives growth.

MercadoLibre's Dominance In Latin America

In my view, MercadoLibre has carved out a significant space for itself in the Latin American e-commerce sector. Data from Statista reveals that as of April 2023, MELI recorded 447 million monthly website/app visits, outpacing global competitors like AliExpress and Amazon, which logged 408.9 million and 240.3 million visits respectively. Looking at specific markets, it's clear that MercadoLibre has a strong foothold. In Brazil, they have a 27% market share , while in Argentina, they claim a notable 68%. However, in Mexico, their presence is less dominant with a 14% share. In my opinion, these figures suggest that MercadoLibre is not just a major player in the region but also adept at navigating the unique challenges of local markets, even when up against global giants.

Local Insight In Latin America

In my view, MercadoLibre's edge in the Latin American e-commerce market stems from its profound local insight. While global competitors often apply broad strategies, MELI grasps the distinct cultural, economic, and logistical facets of the countries it serves. For example, many in Latin America lack access to conventional banking or opt for different payment methods. Addressing this, MercadoLibre launched "Mercado Pago," a payment system tailored to local preferences, facilitating transactions without credit cards.

MELI also tunes into regional buying habits and trust dynamics. They've focused on local marketing, customer support, and product selections that align with local tastes. Their "Mercado Envíos" logistics tackles region-specific shipping challenges, aiming for prompt and dependable delivery. Moreover, by fostering relationships with local sellers and equipping them with essential online tools, MercadoLibre not only enhances its platform but also builds consumer trust. While global rivals have extensive resources, I believe MELI's intimate knowledge of local nuances positions it uniquely, enabling it to meet the specific demands of Latin American shoppers.

Financial Analysis

In my view, from 2018 to 2023, MELI has shown solid financial performance. The company's revenue increased from $1439.65 million in 2018 to $12,144.00 million in the last 12 months, with a CAGR of about 53%. The Earnings Per Share ((EPS)) also improved, moving from -$0.82 to $14.84. This suggests that the company has been effective in turning revenue into profit as the business has scaled its operations, hence also improved operating margins.

As for liquidity, the latest quarterly report shows cash and cash equivalents of $3,300.00 million . The company's total debt is $2,442.00 million, which in my view appears manageable given that all debt can be paid back immediately if required. The current ratio is 1.28, generally seen as a positive sign of the company's short-term financial health. In my opinion, the management team at MELI has been responsible for handling debt and has also refrained from excessive share-based compensation, as the total share count has only increased by about 0.5% in the last twelve months.

Looking at the short term, I expect the company's next quarterly earnings to show revenue growth of about 30% year over year, driven by the trends covered in this article. In the long term, if the current economic conditions continue in Latin America, I believe the company is well-positioned for 20%+ growth.

Valuation

In my opinion, valuation should be a comparison between the market capitalization and the underlying business fundamentals, including future earnings. One method I find useful for this is a discounted cash flow ((DCF)) analysis. As of Q2, 2023 , MELI's current TTM EPS is $14.84. Given the industry growth rate in the Latin American E-commerce market and the dominance of MELI in the market, I anticipate an annual growth rate of 25% for MELI's TTM Earnings per Share over the next five years. Taking this growth into account, the projected Earnings per Share for MELI by Q2 2023 would be $45.29.

Using an exit multiple of 40, which is based on a reasonable P/E ratio for the growth and quality of the business, the estimated price target for the stock in five years would be $1862.89. Therefore, if you invest in MELI at its current share price of $1258.00, the expected Compound Annual Growth Rate would be 9% over the next five years, based on these calculations.

Valuing rapidly expanding businesses like MELI can be intricate. The Latin American e-commerce market's robust growth and MELI's commanding position suggest a promising 25% annual growth in TTM EPS. However, given MELI's continuous innovations, diversified services, and deep market penetration, there's potential for even faster EPS growth. Their adaptability and keen understanding of local nuances might propel earnings beyond expectations. Yet, it's essential to approach with caution. A slight shift in growth can notably impact the DCF rate of return. Moreover, there's the risk of multiple compression as businesses mature. While MELI's prospects seem bright, investors should consider the complexities and risks inherent in valuing high-growth entities.

Conclusion

In my view, MercadoLibre has effectively carved a niche for itself in Latin America's e-commerce sector. As online commerce gains momentum in the region, MercadoLibre's understanding of local nuances has positioned it ahead of many global competitors. However, when evaluating its investment potential, a measured approach is essential. A discounted cash flow analysis suggests potential returns of around 9% in the next five years. But valuing high-growth companies like MercadoLibre isn't straightforward. The unpredictable nature of such firms can lead to varied projections. While I respect the company's growth and leadership, I believe investors should be aware of the challenges in assessing the value of rapidly growing companies, especially in fluctuating markets.

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