Summary
- MercadoLibre is reporting earnings next week and there are three things investors should look out for.
- The Americanas accounting scandal could provide a nice white space for MercadoLibre to take market share.
- Although the company doesn't issue guidance, analysts expect strong 39% topline growth and a strong return to profitability.
MercadoLibre (MELI) has seen a strong rebound in its share price since the lows of last June and has been up 86% since then. Over the last year, it is barely up 2% but it participated in the rally in January, seeing shares up 38% year-to-date. Let's look at what's in store for MercadoLibre with its earnings report next week.
Americanas troubles
One of MELI's big bullish news items over the last months was the reported "accounting inconsistencies" and the following plunge in stock price from Brazilian competitor Americanas (BTOOY). Americanas had uncovered inconsistencies in the order of 20 billion reais (~$3.9 billion) and could be made liable to repay up to 40 billion reais (~$7.9 billion), according to Reuters . The company's CEO and CFO also resigned on the news . This would account for roughly the entire Capital of the company, which has seen a drawdown of 97% from its peak and trading halted.
According to fellow author From Growth to Value , Americanas was MELI's biggest competitor in Brazil , with 21% of the market share versus MELI's 27%. This should open up a lot of white space in the market and will allow for market share to be gained. Investors should listen carefully if Management mentions anything about this situation.
How is Credit evolving?
In my Q3 review article from November and my September article , I mentioned that MercadoLibre's Credit business is a great opportunity, but investors need to watch it closely. MELI offers merchants and customers Credit and has also rolled out credit cards in 2022. As you can see below, the consumer and credit card credit portfolio has rapidly grown. The portion of bad debt also quickly increased but declined for the first time last quarter. The company communicated that they started to group users into segments and provide them with different kinds of credit conditions (or no credit at all). MercadoLibre is doing Credit as a 'Learning by doing' type of business. We should listen for any commentary about this development and look out for further declines in bad debt. Latin America is a very underbanked population, where many people will have their first introduction to the system via MercadoLibre's Page (Fintech) and Credito (Credit) business.
KPIs to watch
The third point Investors should look for are certain KPIs that MELI reports:
- Gross Merchandise Volume (GMV) is the amount of transacted dollars on the E-Commerce marketplace
- Total payment Volume (TPV) and TPV OFF (the portion of TPV transacted outside of the Mercado ecosystem
- Take rates
These KPIs tell us a lot about the direction of the company. GMV is an excellent way to measure the growth of the E-Commerce marketplace. Together with the GMV, we can also look at the Managed Network Penetration in the Mercado Envios logistics branch of the company. I don't see this as crucial as GMV, but it shows us how effectively the logistics operations are improving, representing a big part of the moat. We want to see this number continue to climb from its already high base of 92% and improve Same day + next-day delivery numbers.
TPV shows how the Fintech business is growing; we especially want to see TPV OFF grow. With this approach, MELI is building the Latin American PayPal (PYPL). The chances are high that users who enter the ecosystem via Mercado Pago's payments functions will eventually become customers of the E-Commerce platform or the Credit business.
Take rates are essential to see the operating leverage the company will be able to have. E-Commerce and Fintech are asset-light businesses and MELI should be able to scale the take rates higher over time. Especially the Ad business, which is similar to Amazon's (AMZN) ad business, could help increase Commerce take rates nicely over time. Management noted that the ads business has an EBIT margin of around 77-83%, making it very lucrative. The reason why E-Commerce marketplaces make great ad platforms is that people are going to the site already with the intention of transacting, compared to the ad business of, for example, Google (GOOG) (GOOGL) and Meta (META), where most of the traffic is for entertainment or other reasons. In those models, conversion rates are much lower.
Analyst expectations and valuation
MELI doesn't provide guidance, but several analysts cover the company . The consensus EPS for next quarter is at $2.62 (versus a $0.09 loss last year) and revenue of $2.97 billion (39% growth). Analysts expect MELI to rapidly grow its EPS over the following years as operating leverage takes over. Ten analysts expect a consensus of $23.41 EPS for FY 24 with revenues of $16.31 billion (17 analysts). This leaves MELI still at a high FY 24 PE of 49 times, but I believe we have a long run of operating leverage in front of us. I lower my rating from a Strong Buy to Buy, as the stock ran up 19% and 29% since my last Strong Buy articles.
For further details see:
3 Things To Watch For In MercadoLibre's Upcoming Earnings