MELI - MercadoLibre Stock May Get More Expensive In The Coming Months

2023-05-12 10:20:40 ET

Summary

• It is not unusual for investors to look for growth stocks outside of the U.S. given that some regions are growing at a much faster clip compared to the United States.
• After boosting my stake in StoneCo a few weeks ago, I continued my search for Latin American companies that are well-positioned to grow.
• MercadoLibre caught my attention because of its massive scale and competitive advantages.
• MercadoLibre is not cheaply valued today but for several reasons including the strong earnings momentum, I believe its stock will move higher in the coming months.

It is not unusual for investors to look for growth stocks outside of the U.S. given that some regions are growing at a much faster clip compared to the United States. Latin America is certainly one such region that has captured the attention of investors of late amid the promising growth prospects for the region. Last month, at Beat Billions, we added StoneCo Ltd. ( STNE ) stock to our model growth portfolio to gain exposure to the booming Fintech sector in Brazil. MercadoLibre, Inc. ( MELI ), the Latin American e-commerce giant, caught my attention recently as I am actively looking for hidden gems in international markets.

The Business

MercadoLibre is an e-commerce and online payments company that operates in 18 countries in Latin America. Founded in 1999, MercadoLibre has become the most popular e-commerce platform in the region, with 148 million unique active users as of 2022. The company offers a variety of services and products, such as online marketplaces, payment systems, classified ads, online stores, and digital wallets. MercadoLibre also became the first Latin American technology company to be listed on the NASDAQ in 2007. Since then, the company has grown rapidly and expanded its operations across the continent. The company is often referred to as the Amazon of Latin America as it dominates the region's online commerce and payments sectors.

Exhibit 1: Unique active users of MercadoLibre (2019-2022)

Profitability Soars After Competitor's Collapse

MercadoLibre reported a strong increase in its profits for the first quarter of 2023 as it benefited from the collapse of one of its main competitors in Brazil, Americanas SA. The company posted a net income of $201 million, more than three times higher than the same period last year, and above the Wall Street expectations of $154.4 million. MercadoLibre also saw its revenue grow to $3 billion, up 58.4% year-over-year, driven by a surge in its gross merchandise volume, which reached $9.4 billion.

The company's commerce business continued to grow in the first quarter with an acceleration in the number of items sold by 16% year-over-year, contributing to GMV growth of 43%. The largest markets - Brazil, Mexico, and Argentina - reported accelerated growth compared to the prior quarter. The company's performance was especially impressive in Brazil, where it gained more market share in the e-commerce sector after Americanas filed for bankruptcy protection in January due to accounting irregularities. This allowed other retailers to negotiate better terms with suppliers and offer more attractive prices and services to customers resulting in the company's volume growth in Brazil accelerating significantly to 28% YoY. The number of successful sellers also rose by 23%, positioning the company well to capture more market share in Brazil. Further, logistics played an important role in driving these gains, with fulfillment penetration in Brazil reaching a new high of 41%.

The second largest market, Mexico, also saw a stellar 29% YoY growth in the number of items sold with the company's market share continuing to rise. The company’s logistics network is a strong competitive advantage in Mexico where the company is offering the fastest delivery times in most major urban centers.

Argentina's GMV growth hit 107% YoY, but much of this growth was driven by inflation. Despite a challenging consumer environment in this region, the strength of the company’s brand and value proposition has resulted in a reversal of last year's weakening trend in items sold growth.

Chile, one of the largest markets for the company, saw GMV growth returning to positive territory, with a wide assortment and a strong logistics network contributing to the highest conversion rate across the region. The company's first-party business has also seen an acceleration in growth, with GMV growing 28% in Q1.

Exhibit 2: Gross merchandise volume

With the expansion of its commerce business, the advertising business has also continued to grow rapidly across all markets, with revenue as a percentage of GMV reaching 1.4%. The deployment of technology remains a key driver of the business' expansion, with the company launching the first version of its Ads Console in a test phase in the first quarter to compete for marketing dollars and strengthen advanced areas of the business.

MercadoLibre continued to expand its Fintech arm in Q1, which offers payment solutions, loans, and savings products across the region. The company's payment volume grew by 96% to $37 billion, beating the estimates of $34.8 billion. Off-platform volume accounted for $27 billion, growing more than 100% on an FX-neutral basis for the sixth successive quarter, with Argentina, Brazil, and Mexico all showing faster growth rates than the previous quarter.

Exhibit 3: Total payment value

In Brazil, the company is moving upmarket to serve larger merchants, including SMBs, with POS devices showing good results, despite decelerating growth. The region also accounts for the majority of devices sold, and in Q1, this number dropped below the one million mark as the company focused on larger merchants and device activations rather than just device sales. As a result, TPV per device continued to grow, up 26% year-over-year.

Mercado Pago, the company's digital payment platform, has also been successful in Mexico, where it continues to deliver triple-digit TPV growth, positioning itself as one of the leaders in the digitalization of the country’s financial system. In Chile, the performance of Redelcom, a business that the company acquired at the end of 2021, has surpassed expectations. Further, the company's digital account TPV, which includes wallet payments, peer-to-peer transfers within the ecosystem, and transactions using Mercado Pago cards, has grown at an impressive 164% on an FX-neutral basis. This growth has been driven by strong double-digit growth in Brazil and Mexico and triple-digit growth in Argentina.

In Q1, MercadoLibre launched an important marketing campaign in Brazil and Mexico to position Mercado Pago as a full-service digital account leveraging the awareness of its commerce business to strengthen awareness and consideration of its Fintech business. The company aims to develop a deeper relationship with its 44 million quarterly unique active Fintech users.

The company's loan book grew by 11% from the previous quarter to $3 billion, while its delinquency rate dropped to 28.2%. MercadoLibre said it was not in a hurry to increase its lending pace, especially in Brazil, where credit conditions have deteriorated amid high-interest rates and corporate scandals. Instead, the company will focus on increasing the adoption of its savings solutions in Argentina and scaling up its credit-card offering in Mexico.

Exhibit 4: Credit portfolio statistics

With strong roots in the e-commerce and payments sectors in all of the major Latin American markets, MercadoLibre is well-positioned to grow. As investors, the next step is to understand the macroeconomic environment before evaluating the earnings momentum of the company.

Capitalizing on Latin America's Booming E-commerce Market

Latin America is a rapidly growing e-commerce market with immense potential for online retailers and platforms. According to Statista, the region's retail e-commerce sales were estimated at almost $168 billion in 2022 and e-commerce accounted for 11% of total retail sales, which is expected to surpass 20% by 2027. Brazil and Mexico lead the way in terms of e-commerce market share with each country accounting for almost 30% of the Latin American e-commerce market, but other countries such as Argentina, Colombia, Peru, and Chile are catching up. Currently, Latin America has more than 300 million digital buyers.

Similar to Asia, the increasing adoption of digital payments and the growing popularity of mobile commerce are the primary drivers of e-commerce growth in Latin America. According to Americas Market Intelligence, cross-border e-commerce accounted for 13% of total e-commerce purchases in Latin America. This indicates that Latin American consumers are willing to shop online from international merchants and platforms as long as they provide convenient and secure payment options.

MercadoLibre is well-positioned to take advantage of the booming e-commerce market in Latin America. As the largest online marketplace and payment platform in the region, MercadoLibre has a significant competitive advantage over other players. The company’s Fintech solution is starting to see impressive growth with its payment solution becoming one of the most widely used payment methods in Latin America, enabling customers to purchase goods and services safely and conveniently. The company has also expanded its logistics network, providing fast and reliable delivery to customers across the region.

Strong Earnings Momentum

At Beat Billions, we believe there is a strong, quantifiable relationship between certain earnings events and long-term stock prices. We closely monitor earnings surprises and earnings revisions to gauge a measure of the momentum behind stock prices. As illustrated below, the consensus EPS estimate for Fiscal 2023 has increased from $12.78 in August 2022 to $17.54 today, and MELI stock has positively responded to this favorable development (up close to 50% since last August).

Exhibit 5: EPS revisions

Despite inflationary and interest rate concerns in Argentina and a few other Latin American nations, I believe earnings revisions will continue to trend higher in the foreseeable future as the company continues to benefit from the economic recovery in Latin America. The failure of Americanas will also reflect favorably on MercadoLibre's earnings. Although the company is not cheaply valued today, I believe the earnings momentum will take MELI stock higher from here.

Takeaway

MercadoLibre's success in Latin America's e-commerce and Fintech markets is evident in its strong results and ability to adapt to changing consumer trends and competition. The company's plans to hire over 50,000 new employees this year, demonstrating its resilience and commitment to growth. MercadoLibre's dominant position makes it well-positioned to capitalize on the rapidly expanding e-commerce market in Latin America.

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