MELI - MercadoLibre Is On The Path To Creating The Super App For Latin America

2023-11-20 12:51:24 ET

Summary

• MercadoLibre is building a comprehensive digital ecosystem in Latin America and has the potential to become a "super app" for the region.
• The company's Q3 earnings showed impressive growth and profitability, with net revenues reaching $3.8 billion.
• MercadoLibre's loyalty program, MELI+, and its expansion into entertainment streaming and fintech services are enhancing user engagement and increasing the value of transactions.

What is the Goal of this Article?

Retail investors can miss out on diversity within their portfolio and exceptional returns if they neglect to invest in international stocks. I believe MercadoLibre ( MELI ) is one of the best international stock opportunities for the next decade and only has 10% of retail investor holdings. I believe MercadoLibre is building one of the most comprehensive digital ecosystems in Latin America and could evolve into an eventual “super app” for this region of the world. This region of the world is also one of the most unbanked populations with over 122 million people, according to the World Bank in 2021, being unbanked. I will also review this past Q3 Earnings and the consistent performance of this company and how they are solving this problem for these regions, but also the risks shareholders need to be mindful of.

The term "super app" is often used to refer to an application that offers a variety of services under one platform, becoming an integral part of users’ daily digital routine. This concept, popularized in Asia by apps like WeChat and Alipay, is now resonating in Latin America, with MercadoLibre, Inc. ( known as MELI ) at the forefront of this transformation. The company's Q3 earnings call gives us a glimpse into its trajectory toward becoming not just an e-commerce giant but a central hub for a myriad of services, including digital payments, streaming, and fintech solutions.

MELI is not just a one hit wonder quarter company but has shown a sustained trajectory of growth and profitability over the past several years. Let’s jump in and dissect MercadoLibre's financials, strategy, ecosystem, and potential risks, offering investors a panoramic view of why this company is not merely riding a wave but I believe is creating one.

A Financial Review: Unpacking the Q3 Earnings Results

The Q3 earnings call, spearheaded by CFO Martin de los Santos, marked a remarkable period of success for MercadoLibre. Net revenues soared, especially in Mexico with a 60% YoY increase, and in Brazil with a 40% rise. These markets have significantly contributed to the company's total revenue, evidencing MercadoLibre's deepening footprint in the region's e-commerce and fintech sectors. The company more than doubled its income from operations for the fourth consecutive quarter, with margins expanding, demonstrating impressive operational efficiency and cost discipline. Some of the additional key takeaways MELI wanted wall street to take away from Q3 are listed in the image below.

The third quarter of 2023 has been stellar for MercadoLibre, with net revenues reaching a breathtaking $3.8 billion, marking a 69.1% year-over-year growth on an FX neutral basis. This surge is not an anomaly but a testament to the company's robust business model and aggressive investment strategy that has consistently borne fruit. The operational income followed suit, with an impressive 18.2% margin, reinforcing the company's profitability narrative. The Total Payment Volume (TPV) and Gross Merchandise Volume (GMV) figures stood at $47.3 billion (up 121.2% YoY) and $11.4 billion (up 59.3% YoY), respectively, unequivocally signaling that MercadoLibre's services are in high demand.

To appreciate the gravity of these numbers, one must look back over the last several years. MercadoLibre has not only grown; it has done so consistently, navigating the complex economic climates of multiple Latin American countries. From regulatory challenges to currency fluctuations, MercadoLibre has shown an uncanny ability to adapt, innovate, and execute with precision. Its GMV and TPV have seen upward trends that many of its peers can only aspire to, supported by a deep understanding of the local markets and customer behavior.

As many tech companies struggle to find a path to profitability, MercadoLibre has turned that corner and continues to grow in this area. The company's multiple business segment revenue streams, once considered experimental, have now matured into robust outlets of profitability. Advertising services, for instance, have seen sustained growth, contributing significantly to the bottom line. This evolution from growth to profitability without sacrificing the former is a delicate balance that MercadoLibre has mastered.

MELI+: A Loyalty Program Ready to Explode

The recent relaunch of MercadoLibre’s loyalty program as MELI+ is a strategic move toward enhancing user engagement. MELI+ isn't just a loyalty program; it's a portal to an expansive content bundle, including partnerships with Disney+, Star+, and HBO Max, offering premium video and audio content. The program also features free shipping on millions of items and a music subscription through Deezer. This initiative is designed to bind users closer to MercadoLibre’s ecosystem, increasing the frequency and value of transactions.

Customers can either pay $3.67 USD a month to have MELI+ or earn MELI+ with their user points system which rewards buying and selling on the platform, along with using its fintech products. MELI is following the Amazon Prime playbook and pricing their offering a tiny bit more than Amazon ( AMZN ) does in the region but providing much more value. MELI has a more loyal following in Latin America than Amazon as it has been the dominant e-commerce force in Latin America for the last 20 years.

I believe the company saw the success and impact Prime memberships had for Amazon and is going to attempt the same business model. It is important for investors to know MELI+ was their former loyalty program of level 6 points but the relaunch product MELI+ has only been around for a few months and only in Mexico and Brazil currently. This product offering is in its infancy but looks to have high promise, but not enough impact yet to report individual KPIs in earnings reports.

Entertainment Streaming Content with Mercado Play and Clips

MercadoLibre is venturing into content streaming and social media-esque features with Mercado Play and Clips. Meli has created Mercado Play, its first-ever streaming content service powered by advertisements. Meli Clips, reminiscent of TikTok's short video format, are adding layers to the user experience on the platform. These features not only increase user stickiness but also open new revenue streams through advertising, leveraging the vast user base already engaged in MercadoLibre's marketplace and payment services.

MELI is paying attention to all the digital entertainment that Americans utilize daily and what at times can be all-consuming. They are building these services into their 360-degree digital ecosystem or “super app” that allows a person in Latin America to find whatever they need from MercadoLibre. Whether it is starting your own e-commerce business, shopping online, watching movies, listening to music, posting video clips, purchasing insurance, utilizing digital fintech banking, and more, MercadoLibre is delivering it to its customers and in their native country culture.

Mercado Pago: The Fintech Powerhouse

The significant number of unbanked individuals in Latin America is an example of the region's challenges with financial inclusion. Efforts to improve financial inclusion in Latin America continue, with various initiatives aimed at expanding access to banking services and fostering the use of digital financial products. These initiatives often involve collaborations between governments, financial institutions, and fintech companies to address barriers to inclusion such as lack of access to traditional banking infrastructure, high costs of financial services, and limited financial literacy.

The region's fintech sector is led by MercadoLibre’s offering called Mercado Pago which offers creative payment solutions, like that of companies in the U.S. like Block, Inc. ( SQ ). This growth in fintech solutions has also been bolstered by the increasing penetration of mobile technology, allowing more people to participate in the digital economy even without traditional bank accounts.

Mercado Pago stands out as a cornerstone of the envisioned super app that MELI is trying to create. With a TPV surpassing $47 billion, the service is extending its reach in digital payments, credit card issuance, and financial services. By continually refining its underwriting models, MercadoLibre is scaling this segment aggressively, aiming to become the financial service provider of choice within its ecosystem. The heart of MercadoLibre's success lies in this ecosystem—a multifaceted platform that intertwines e-commerce with fintech services, creating a self-sustaining loop of growth.

From MercadoPago, its payment solution that addresses the region's unique financial landscape, to its logistics prowess that promises and delivers products with unprecedented efficiency, the company has built more than just a marketplace; it has created a comprehensive suite of services that cater to every aspect of online commerce. The numbers are telling: MercadoPago's off-platform TPV growth accelerated across the board, and its credit card issuance in Brazil and Mexico has skyrocketed, reflecting the trust and reliance users have on its financial products.

Risks and Mitigation: A Balanced Perspective

Despite these ambitious expansions, there are inherent risks. Some of these inherent risks for an investor, especially ones not living in Latin America, are as follows:

• MercadoLibre's Founder-Led Model: This has been a double-edged sword, fostering innovation but also concentrating the fate of the company in the hands of a few. Leadership transitions, if not managed properly, could spell volatility for the company's direction and stock price.
• Geopolitical and Economic Shifts: In key markets like Brazil and Argentina these can represent potential challenges. Yet, MercadoLibre has historically navigated such turbulence with agility and foresight, especially with the previous challenges in the Argentina government and economy.
• Cultural Barriers: Understanding the nuances of consumer behavior, local market trends, and preferences in a foreign country can be complex. Retail investors might not have the same innate understanding of these markets as they do of their home country, leading to a lack of confidence in making investment decisions.
• Currency Risks: Fluctuations in currency exchange rates can significantly impact the returns from international investments. The value of the foreign investment in the investor's home currency can decrease even if the stock's value increases in its local market. This additional layer of risk can deter investors who are not comfortable with hedging strategies or who do not want to deal with the complexity of currency fluctuations.
• Lack of Exposure to Products: If retail investors are not familiar with the products and services offered by a foreign company, they may be less likely to invest in it. Familiarity with a product or service can be a driving factor behind investment decisions.
• Home Bias: There is a natural tendency for investors to favor their home market over foreign markets, known as "home bias." This can be due to a combination of familiarity, patriotism, and the perception that investing domestically is simply safer or easier.

Conclusion: A Super App in the Making?

MercadoLibre is strategically positioning itself to become more than an e-commerce leader; it's vying to be the super app of Latin America. By intertwining diverse services such as streaming, fintech, insurance, and traditional online shopping, the company is building an ecosystem that aims to meet all the digital needs of its users.

While there are risks, as with any ambitious endeavor, the growth trajectories suggest a bright future. For long-term investors, MercadoLibre's journey could be one of transformation, not just for the company, but for the entire region’s digital landscape.

Investors should also have confidence in the risk to reward ratio when it comes to MercadoLibre, as you can see, they have delivered outstanding shareholder results over the last decade. Institutional investors also have stayed true to the stock as over 80% of shares are held by institutions. They seem to understand there is still quite the growth trajectory for this company and the economies in this region of the world. Latin America has an expanding middle class that continues to grow and over 244 million people who still do not have internet access but could change in the future. Investing in MercadoLibre gives retail investors diversity in their portfolio with holding a large cap international stock and exposure to expanding region of Latin America.

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