Summary
- MercadoLibre reported a strong finish to the year with revenue and EPS both beating consensus expectations.
- The company continues to demonstrate their leadership position throughout Latin America all while improving their financial profile.
- Valuation remains attractive with the stock currently ~4.5x forward revenue and ~34.5x forward EBITDA.
MercadoLibre (MELI) recently reported a strong end to the year with revenue and EPS coming in above consensus expectations. MELI has continued to demonstrate their leadership position as the premier eCommerce marketplace platform throughout Latin America. The company has significantly benefitted from the accelerated adoption of eCommerce, driven by the global pandemic. However, MELI has done a great job making investments in their Payments and Credits businesses, which have started to generate increasing levels of profitability.
Even with fears of a potential recession looming throughout Latin America, I believe MELI has positioned themselves as the clear leader in the market and has been increasing their traction with consumers.
The stock currently trades ~4.5x forward revenue and ~34.5x forward EBITDA, which I believe remains undervalued given their recent revenue growth performance (Q4 revenue grew 56% yoy on a constant-currency basis) and improving profitability profile.
While the stock has had a nice 40% performance so far this year, MELI remains around 40% below their all-time highs. Given their improving financial profile and leadership position throughout Latin America, I believe MELI remains an attractive stock at current valuation levels.
Financial Review and Outlook
MELI reported another strong quarter with revenue of $3.0 billion, growing 41% yoy and beating consensus expectations by $40 million. Given MELI's exposure to Latin America, foreign currency has been a material headwind, with revenue growing 56% yoy on a constant-currency basis.
Total payment volume grew 80% yoy on a constant-currency basis to $36.0 billion, with GMV growing 35% yoy on a constant-currency basis to $9.6 billion. Despite some weakness seen in Argentina during the quarter, strength within Mexico and Brazil helped offset some of this, as MELI continues to demonstrate strong underlying growth trends despite the macro environment becoming more challenged.
As I discuss a bit more below, the company saw a strong quarter from their fintech and payments business, which helped drive profitability upside. GAAP EPS for the quarter came in at $3.25, which easily beat expectations for $0.93. I believe it's important to note that MELI's EPS metrics are on a GAAP basis and do not add-back the typical non-GAAP adjustments, such as stock-based compensation and acquisition amortization. I believe this further demonstrates the company's strong financial statements, as we have seen many other technology companies report "profitability" on a non-GAAP basis, while GAAP results remain negative.
Within MELI's Marketplace segment, GMV growth accelerated to 35% yoy, with Brazil and Mexico driving the acceleration. The number of unique buyers also reached the highest level ever of 46 million, which grew 13% yoy. This is MELI's "bread and butter" given their status as the premier eCommerce platform within Latin America. This business segment has been a significant beneficiary of the pandemic, with management discussing several improvements they have seen.
Over the last three years, we have built a GMV base that is 2.5x larger than in 2019 and continues to grow, we have ramped-up a logistics network with world-class delivery speeds (GMV delivered within 48 hours rose from an average of 44% in 2019 to almost 80% in 2022) and we have strengthened the other key pillars of our Commerce value proposition: assortment, price and service.
Yes, there are some macro concerns throughout Latin America that may pressure the consumer, however, I believe the ongoing shift in retail from in-person shopping to eCommerce is a significant trend that can help offset this. With MELI being the leading marketplace throughout Latin America, I believe they are very well positioned to weather an economic slowdown.
Within their Payments segment, acquiring TPV grew 61% yoy on a constant-currency basis, which accelerated from last quarter and was the fastest growth seen in the past six quarters. Digital account TPV, which includes transactions such as mobile wallet payments, P2P transfers, and prepaid/debit/credit cards, grew 140% yoy on a constant-currency basis.
In total, the acquiring and digital account TPV grew 80% yoy constant-currency to $36.0 billion, and I believe will continue to drive not only revenue growth, but profitability for MELI. One of the most challenging aspects of a payments business is garnering enough scale and transactions. As MELI continues to scale, more consumers will use their payments, and these transactions and volumes come on at a high incremental margin, meaning MELI's profitability should continue to improve over time. Management discussed the improvements made within their Credit offering.
2022 has been a learning curve for our credit card product, and after having slowed new issuance in Q1 to make adjustments to the underwriting models, we have seen a much-improved performance from the most recent cohorts. We are encouraged by the performance of our credit card, which remains a key element of our wider MercadoPago value proposition to Individuals.
Our credit products complement our wider Mercado Pago offer, and 2022 has been an important year in broadening that offer. We think we now have a product stack in place that is sufficient to meet our users’ core day-to-day needs, which enables us to accelerate our efforts to achieve principality.
While guidance for 2023 was not provided, I believe the company's core Marketplace and Payment function will continue to perform well. Latin America has historically been a cash-based economy, and MELI has done a great job not only penetrating the eCommerce market, but providing adjacent financial services solutions. Consumers continue to utilize MELI's Payment and Credit solutions, which only adds to MELI's ecosystem value proposition.
Consumer habits are also very sticky, and we saw the pandemic rapidly accelerate the transition towards eCommerce. Even if Latin America does enter into a recession, consumers have started to develop the habit of online shopping, and it may take another black swan event for behaviors to drastically change from here.
Valuation
Despite MELI's stock being up over 40% so far this year, it still remains around 40% below their all-time highs. The strong Q4 earnings report did reinforce the competitive advantages MELI has in the Latin America markets, with strength in Brazil and Mexico offsetting some of the weakness seen in Argentina.
One of the challenges with MELI is valuation and what the appropriate multiple is to pay for the stock.
On one hand, MELI's revenue growth rates remain very impressive, which typically results in investors relying on a revenue multiple for valuation purposes. The stock currently trades ~4.5x forward revenue, which seems undervalued given the company's strong growth trajectory, large TAM, and leadership position.
However on the other hand, MELI has already demonstrated history a generating GAAP profitability, and this typically results in a forward EBITDA multiple being used for valuation. With the stock currently trading ~34.5x forward EBITDA, I still believe the stock is undervalued. While MELI only reports EBIT, I believe EBITDA is a great valuation metric as it can help normalize D&A expenses across different business models.
2022 EBITDA was ~$1.5 billion and given the combination of strong revenue growth and improving profitability profile, it would not be surprising to see EBITDA more than double in the next 2-3 years. I believe EBITDA could reach ~$4.5-5 billion by 2025, which would require revenue growth of 30%+ as well as ongoing margin expansion, something that MELI has already demonstrated in recent quarters and years.
If we were to assume a 30x EBITDA multiple on the ~$4.5-5 billion, which is lower than the current valuation multiple, then the stock could be worth $2,500-$3,000 in the next 1-2 years, implying well over 100% upside from current levels.
While this is a somewhat optimistic scenario, I believe this outcome is becoming more and more likely as MELI continues to execute and produce accelerating, improving financials. For now, I continue to remain bullish on Latin America's leading eCommerce platform.
One of the biggest risks to MELI is their exposure to the Latin American economies. These have typically been more volatile that other established economies, and given the macro uncertainties prevailing right now, a prolonged downturn in Latin America could have material negative impacts on MELI. In addition, as MELI continues to scale, they may be challenged in driving operational efficiencies, which could prevent margin expansion.
For further details see:
MercadoLibre: Impressive Results For Undervalued Leader