Summary
- MercadoLibre's relative strength against its peers in a challenging macroeconomic environment highlights the company's strong competitive positioning.
- Mercado Pago's growing popularity fuelled triple-digital growth in total payments volume for the fourth consecutive quarter.
- Rising interest rates and slowing economic conditions weighs on the company's credit and lending business.
MercadoLibre ( MELI ) recently released its earnings for the third quarter. Despite the challenging macroeconomic environment, the company recorded strong growth across its commerce and fintech businesses. Total revenue grew 61% year-on-year on an FX-neutral basis to US$2.69 billion, falling slightly below wall-street estimates (-0.19%). This, however, was offset by improvements in operating efficiency, with the company's operating margin growing more than 500 basis points year-on-year to 11%. Moreover, normalized EPS increased 33% to US$2.56, beating analyst expectations of US$2.49. Finally, improvements in working capital management positively impacted MELI's operating cash flow and cash balance, which grew sequentially to US$724 and US$1455 million, respectively, during the quarter.
Positive Takeaways
1. Improving profitability
As highlighted below, MercadoLibre's operating margin has fluctuated considerably since the start of 2019 - this is expected given the cyclicality of the e-commerce and fintech industries.
MELI Operating Margin (OJRB Investment Research)
What's promising, however, is MercadoLibre has grown its operating margin consistently quarter on quarter over the last 12 months. What's more, the company has done so as macroeconomic conditions have continued to weaken. Whether this trend can continue remains to be seen. However, it is a positive sign for investors, nonetheless. Importantly, lower sales and marketing spending as a percentage of sales have been the main driver of margin expansion over the last twelve months. This suggests MELI is improving its brand awareness and competitive positioning within Latin America.
2. Expanding advertising product mix
During the quarter, MercadoLibre's advertising services revenue grew to 1.3% of total GMV , up from 0.9% a year prior. Driving this growth was the rollout of new advertising tools that allow for more sophisticated, automated, and personalized display advertising for merchants. During the earnings call, CFO Pedro Arnt stated the new tools were launched towards the quarter's back end. Subsequently, he expects advertising demand to be even stronger in Q4 and 2023 despite weak economic conditions. Given adverting is MELI's highest margin business unit, generating an approximate 75% operating margin, sustained high growth in this segment will help to push up margins in the future.
3. Strong Fintech user growth
MercadoLibre's fintech business, Mercado Pago, had another exceptional quarter, with unique active users growing to over 40 million for the first time. Notably, Off-platform total payment volume (TPV) grew by triple digits (122%) for the fourth consecutive quarter, reaching US$23 billion. Additionally, Mercado's mobile point-of-sale businesses in Mexico and Chile were strong contributors to overall growth, as were QR in Brazil and its Digital Banking Account solutions in Argentina. Notably, mobile point-of-sale devices increasingly serve larger merchants, which tend to transact more frequently than micro-merchants.
Negative Takeaways
1. Weakness in credit and lending business
MercadoLibre's credit portfolio growth decelerated due to a slowdown in loan origination. The broad weakening in the lending environment, particularly in Brazil, contributed to a deliberate decision by management to slow the rate of originations.
Moreover, the portfolio's total non-performing loan (NPL) ratio rose to 37.0% in the third quarter, with management stating they are seeing a higher probability of default amongst customers. As such, actions were taken in Q3 to reduce exposure to specific cohorts and to limit access to certain products. Ultimately, the increase in delinquent loans negatively impacted MercadoLibre's total operating expenses in Q3.
Final Comments
MercadoLibre is clearly dominating Latin America's e-commerce and Fintech industries. In a slowing macroeconomic climate, MELI's strong growth indicates the company is growing its market share across e-commerce, lending, and payments. What's more, MELI appears to be on the front foot for future growth, accelerating new engineering hires while many firms reduce headcount. While the company has slowed down its loan origination, this is a prudent move by management, given the uncertain economic environment. Turning to MercadoLibre's commerce and Fintech businesses, the strong growth in total users, GMV and TPV highlight the durability of MercadoLibre's business model. The interoperability of MELI's growing e-commerce, payment and fulfillment services continues to offer small businesses, consumers, and entrepreneurs more value over time. Moreover, as the region's market-leading fintech and e-commerce platform, MELI will continue to benefit from the growing adoption of digital payments and e-commerce, which are both nascent industries in Latin America.
For further details see:
MercadoLibre Delivers Yet Again - Q3 Earnings Summary