MELI - MercadoLibre: Ecommerce Is Booming And Fintech Is Thriving

2023-05-16 09:00:00 ET

Summary

• MercadoLibre has been dubbed the "Amazon of Latin America" due to its leading e-commerce business which has reported an acceleration in its gross merchandise volume growth to 43% YoY in Q123.
• Its Fintech segment also offers a huge opportunity, as 70% of Latin America's population is unbanked or underbanked.
• MercadoLibre reported solid financial results in Q123 as it beat both its revenue and earnings growth estimates.

MercadoLibre ( MELI ) is referred to as the "Amazon of Latin America", due to its strong e-commerce business in the region. In my July 2022 post on the stock, I discussed its "Value, Growth and Outstanding execution", and the stock has delivered a return of ~94% for investors. Since that point, the company has continued to realize the last two pursuits, growing revenue by 35% year over year, and management has continued to execute exceptionally well. In this post, I'm going to break down the company's first-quarter financial results for 2023, before revising and revealing my valuation model and forecasts for the business. Is MercadoLibre now too spicy a price for investors? or is it still worth loading up on? We will find out in this post, let's dive in.

Roaring Financials

MercadoLibre reported strong financial results for the first quarter of 2023. Its revenue was $3.04 billion which increased by 35.1% year over year.

It should be noted that this growth rate has slowed down from the 41% level reported in Q4,22 and the rapid 63% YoY growth reported in Q1,22. However, this pattern of slowing revenue growth has been a common occurrence across many technology stocks I have covered (see my other posts). Therefore I believe this is mainly driven by macroeconomic factors and not a long-term intrinsic business issue. In addition, its revenue still beat analyst forecasts by $150.79 million.

The business also reported solid operating income of $340 million in Q1,23 which increased by a rapid 144.6% year over year, and stabilized at ~11% operating margin.

Another positive for MercadoLibre is its Gross Merchandise Volume [GMV], has continued to grow at a rapid 43% rate, which is fast than the 35% reported in Q4,22 and the 32% reported in Q1,22. This is on an FX-neutral basis, so its clear currency exchange rates are still impacting growth, which again I believe is more of a cyclical occurrence. The main growth was driven by Argentina which reported a staggering 107% YoY growth rate in GMV. Given Argentina is the second-largest country in Latin America and the third-largest economy (after Brazil and Mexico) this is a positive sign.

Strong growth was also reported in the largest economy in Latin America, Brazil, which reported a 28% YoY growth rate, which was fast than 22% reported in Q4,22. Mexico GMV growth was 28% YoY, which was flat relative to Q4,22. In my mind, this was expected as Mexico offer much more fierce competition with the "real" Amazon ( AMZN ) competing heavily in the market.

Overall MercadoLibre's total unique buyers continued to grow from 39.6 million in Q1,22 to 46.1 million by Q4,22. This is a hugely positive sign given the global e-commerce market is going through a cyclical decline.

In my previous post on MELI, I discussed its key competitive advantage against foreign competitors (Shopee and even Amazon) was its vast fulfillment network penetration. This moat continued to widen in Q1,23 with its total managed network penetration reaching a record level of 93.4%. Of course, this varies by country with its most mature markets such as Argentina and Brazil reporting 93% and 92% respectively. Colombia and Chile also have surprisingly high penetration at 91% and 95%.

The real importance of this penetration is it enables a more efficient network (economies of scale) and much better customer service due to faster delivery. Approximately 77% of its shipments were delivered within 48 hours. In comparison, competitor Shopee doesn't have the vast infrastructure (at ~5% market share), and thus although its orders may be cheaper, it can take multiple weeks in certain countries. This makes complete sense as I previously covered a U.K based e-commerce (fashion company) called boohoo ( BHOOY ). This business is struggling to maintain competitive in places such as the U.S due to long shipping times and thus has made it a strategic priority to open a U.S based distribution center. Hence the power of already-built logistics infrastructure, especially as inflation has risen the cost of building materials and labor. For rental properties, rents are usually tied directly to inflation which has been sky-high.

Fintech Continues to Thrive

MercadoLibre's Fintech business has continued to thrive with its total payment volume [TPV] increasing by a blistering 96% year over year. Studies indicate approximately 70% of the Latin American population is unbanked with no checking account or "underbanked" with no access to credit, MercadoLibre has a huge market opportunity.

MercadoLibre has also continued to grow its credit portfolio with originations increasing from $2.3 billion in Q1,22 to $2.688 billion by Q1,23. In addition, its Interest Margin after losses has begun to stabilize at 38.8% as of Q1,23. This is a positive sign as a major concern I highlighted in my prior posts was the "recessionary environment" which could cause a large spike in loan defaults.

Valuation and Forecasts

In order to value MercadoLibre I have plugged its latest financial data into my discounted cash flow valuation model. I have increased my prior forecast for the next four quarters from 22% to 25%, which is still fairly conservative given the business has grown its revenue by 35% in YoY as of Q1,23. In years 2 to 5, I have revised up my growth estimate by 2% to 30% per year. Again this is fairly conservative given the large unbanked population in Latin America, and a rebound in the e-commerce market which is expected. MercadoLibre also has the opportunity to more aggressively grow its loan portfolio during the "good times", as management is being conservative currently which I believe is prudent to maintain stable margins and lower losses from defaults.

Moving onto margins, I have adjusted the operating margin to 12% for "next year" or the next four quarters. This is based upon an extrapolation of the trailing 12-month 11% margin plus a 1% adjustment for R&D expenses. Over the next 8 years I have forecast an operating margin of 19%. This may seem high for an e-commerce company but I expect the main margin driver to be its fintech business which contributes to ~50% of total revenue. As a comparison, a mature fintech such as PayPal ( PYPL ) has averaged a 16%-17% margin over the past couple of years. Although this could be enhanced by scaling back R&D etc.

The business also has a solid balance sheet with $3.2 billion in cash and short-term investments. The company does have total debt of ~$5.5 billion but the vast majority $2.46 billion is long-term debt and thus manageable.

Given these factors I get a fair value of $1,616 per share, the stock is trading at approximately $1,279 at the time of writing and thus surprisingly is still 20.85% undervalued.

The company also trades at a price-to-sales [P/S] ratio equal to 4.82, which is 55.41% cheaper than its 5 year average.

Risks

Competition

As mentioned prior MercadoLibre faces fierce competition from major players such as Amazon ( AMZN ), Wall Mart, and even Shopee. In addition, I previously did a report on one of the fastest growing (but still little known) e-commerce apps called Temu in the U.S, owned by Chinese e-commerce company PDD Holdings ( PDD ). In my report , I stated that this company offers cheaper prices than Amazon for certain products that I researched due to its direct shipping from China. The business has also announced plans to expand into Latin America and thus could disrupt MercadoLibre due to its cheap prices. A positive is MELI has a vast infrastructure which I discussed prior is its competitive advantage due to rapid shipping times etc. China may be cheap but it certainly isn't fast.

Final Thoughts

MercadoLibre is a tremendous company that has two main growth engines its leading e-commerce business and its thriving fintech arm. The business has a huge total addressable market to continue to do what Amazon has achieved in the U.S, but in Latin America. In addition, the Fintech potential is even greater due to the vast unbanked population. Usually, such great companies often come at a high price. The good news is my valuation model and forecasts indicate the stock is still undervalued and thus could offer a long-term investment opportunity.

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