MELI - MercadoLibre: No Longer In The Bargain Bin (Rating Downgrade)

2023-05-04 10:30:00 ET

Summary

• MercadoLibre posted a solid earnings release, outperforming Wall Street estimates on revenue and profitability.
• The company continues to see a recovery in its commerce segment, even though the growth in its fintech segment has normalized.
• Investors who ignored the pessimism in late 2022 and early 2023 are well-rewarded, as MELI is up nearly 60% from its January lows.
• However, investors who missed the boat should not rely solely on MELI's strong momentum to justify an entry point, as its valuation and price action are unattractive.

Leading LatAm's e-commerce and fintech operators MercadoLibre, Inc. ( MELI ) delivered a robust earnings release yesterday (May 3), outperforming the consensus estimates on revenue and profitability.

Management also highlighted share gains several times in its earnings commentary /release, as growth was broad-based. Its most crucial geographical market, Brazil, also saw solid growth despite the inflationary headwinds.

As such, MercadoLibre's gross merchandise value or GMV growth accelerated further from FQ4, up 23.1% YoY. Market operators who anticipated the inflection point in the growth deceleration of its commerce segment in FQ3'22 have gotten it spot on.

As seen above, MELI's GMV growth bottomed out at 17.8% in FQ3 before recovering to 20.8% in FQ4. As such, investors who picked MELI's lows in October 2022 and early January 2023 benefited from weak holders concerned about the company's ability to drive a sustained recovery.

Therefore, investors need to recognize MercadoLibre's wide-moat advantages, locking in consumers and merchants into a one-stop ecosystem.

With quarterly unique active users crossing the 100M mark in FQ1'23, MercadoLibre's massive network effect sees it covering "14.9% of the total population of Latin America."

Hence, it has allowed MercadoLibre to increase its commerce take rate again, as it rose to 17.8% in FQ1'23, up from last quarter's 17.3%.

Management attributed the increase to several factors, including the company's ability to implement "selective pricing on shipping fees in different markets." In addition, MELI was also able to strategically move toward "higher take rate categories" and improve its seller fees in its commerce marketplace.

Coupled with a managed network penetration rate of more than 93% in FQ1, the company's ecosystem is getting increasingly sticky.

As such, it helped drive a significant improvement in the company's operating margin to 11.2%, up 500 bps from last year's 6.2%. Moreover, despite facing gross margin dilution from its first-party or 1P investments, the company still managed significant operating leverage gains.

Accordingly, MercadoLibre posted a 28% FX-neutral GMV growth in its 1P segment, up significantly from last quarter's 8% uptick. The 1P business is critical to strengthening its network moat and, thus, is a crucial investment area for the company.

Management highlighted that its adjustments to improve 1P profitability have progressed well, resulting in "higher gross margin, faster inventory turn, and wider use of automatic pricing."

As such, the company sees the potential for growth to accelerate moving ahead, improving its marketplace competitiveness.

However, total payment volume or TPV growth decelerated in FQ1, as MercadoLibre posted an increase of 46.1%, down from last quarter's 48.3%. The trend for MELI's fintech segment continues to see a normalization in growth, which is likely expected.

Nevertheless, its take rate of 3.7% remains healthy, even though its interest margin after losses or IMAL fell to 38.8% in FQ1 (down from FQ4's 48.3%). Management highlighted "negative seasonality" but stressed that bad debt provisions were still "lower than the second and third quarters" of FY22.

As such, fintech's slowdown coincided with a more robust commerce recovery, lending credence to MELI's robust ecosystem as LatAm's leading platform.

MELI's valuation has normalized after rising nearly 60% from its January 2023 lows. Seeking Alpha Quant rated MELI's valuation with an F grade, even though it aced most of the other factor ratings.

Hence, it should be clear that MELI is priced for high growth. However, we assessed that the margin of safety isn't sufficient for investors looking to add more positions at the current levels.

Dip buyers who added in late 2022 and early 2023 are also unlikely to return aggressively, as MELI has not suffered a meaningful pullback since the start of 2023.

Thus, we believe it's risky for investors to rely solely on strong momentum to buy MELI when entry levels are not supported by attractive valuation or pessimism, leading to astute dip buying opportunities.

Rating: Hold (Revised from Buy).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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