Summary
- MercadoLibre delivered another excellent quarter with numbers exceeding expectations in Q4.
- Revenue growth is outstanding and the business is widely profitable.
- Valuation is more than attractive for such a high quality business.
MercadoLibre ( MELI ) delivered another excellent quarter in Q4, with revenue exceeding expectations and profit margins consistently expanding. The company is stronger than ever from a competitive point of view, and long-term growth opportunities are clearly exciting. Both in terms of revenue and free cash flow, valuation is quite attractive at current price levels.
Outstanding Execution At Scale
In times when most players in e-commerce and fintech are being hurt by economic headwinds, MercadoLibre delivered another excellent quarter.
This is not just because the industry is younger and more vibrant in Latin America, but also because MELI's seasoned management team knows how to adapt and consistently deliver across changing economic environments.
Total revenue exceeded $3 billion during the quarter, this represents an increase of 56.5% year over year on a constant currency basis.
The fintech business is firing on all cylinders, with the total payment volume (TPV) growing 80% year over year on a currency-neutral basis.
Off-platform TPV grew 121%, this is the fifth consecutive quarter with growth rates in the triple digits for MercadoPago off-platform.
Management observed a deterioration in economic conditions during the second quarter of 2022, so it decided to reduce risk exposure in the credit business. This decision allowed the company to deliver record profits and reduced credit provisions in Q4.
MercadoPago's credit portfolio is mostly short-term, so it can rapidly adjust credit risk when economic conditions change.
The company is expanding into other financial services such as insurance and investment funds in key markets like Brazil. For many low-income consumers in Latin America, Mercado Pago may represent the first and only opportunity they encounter in order to access financial services in the region.
In the commerce business, gross merchandise volume (GMV) increased 35% to $9.6 billion, and management considers that the company extended its market share leadership across most markets where it operates.
MercadoLibre's take rate in commerce increased by 20bps versus the same quarter last year, driven mostly by a higher penetration of advertising. The company is just giving the first steps in advertising, and this looks like a compelling opportunity for growth and profitability over the years ahead.
MercadoLibre has built a gigantic distribution network over the past several years, with managed network penetration exceeding 90% in most countries. In 2019 the company had the capability to deliver 44% of GMV in 48 hours, and now it is delivering almost 80% of GMV in two days.
Expanding Profitability
Profit margins can fluctuate in particular years due to spending needs for growth and specific investments in areas like technology, logistics, and demand generation. Nevertheless, the company is comfortably profitable and management plans to keep expanding profitability in the years ahead.
Gross margin expanded from 40% of revenue in Q4 of 2021 to 48.6% in Q4 of 2022 as 1P sales declined as a percentage of revenue. The company is working on improving the economics of 1P sales and it will consider accelerating this revenue source again when profitability improves.
Operating margin increased from 1.1% of revenue to 11.6% on the back of higher gross profit margins and improved cost efficiencies across the board.
Management intends to keep a balanced approach to growth investments versus profitability. Investors can expect consistently growing profits in the years ahead, but margin expansion is not going to be linear and stable every year. The expansion in margins will be more visible in longer timeframes.
In the words of CFO Pedro Arnt during the conference call
We try to manage the financial model for consistent annual increase in EBIT dollars, ideally also modest but consistent margin expansion. That depends a little bit on what happens in terms of mix shift, but we do try to manage the different businesses and the different sub-business units to deliver margin expansion year-on-year-on-year going forward.
Yet at the same time, we still continue to see ourselves as a company that wants to deliver market share gains, continue consolidating its leadership position.
If we do deliver on this consistency, when we look out three to five years, we have a very, very healthy P&L in our hands.
In a time when most companies in e-commerce and fintech are firing employees, MercadoLibre is planning to continue hiring engineers in 2023, although at a slower rate than in prior years.
The company never overexpanded during the bullish phase of the tech cycle, so it doesn't need to cut the size of the workforce when the tide has turned. This clearly speaks volumes about financial discipline and the overall quality of the management team.
Attractive Valuation
MercadoLibre stock is quite cheap by historical standards. The median EV to Sales ratio over the past decade is 11.7, and the stock can be considered cheap - one standard deviation below the median - at 7.3 times revenue.
As of the time of this writing, MELI is trading at 5.6 times its revenue, which is quite cheap for a company delivering excellent numbers in terms of both top-line growth and profitability.
MercadoLibre produced nearly $2.5 billion in free cash flow during 2022, meaning that the stock is currently priced at around 25 times the free cash flow generation.
This is a business that can easily deliver revenue growth of around 25% per year over the next several years, combined with consistent profit margin expansion in the range of 1% to 3% annually. Investors are now paying a very reasonable price for a free cash flow stream with abundant growth potential.
Importantly, valuation is always dynamic, and MELI has an excellent track record of outperforming expectations over the long term.
Five years ago Wall Street was projecting MELI to make $2 billion in sales by 2023, and now they are projecting $13.1 billion. In the same period, earnings estimates have increased from $2.8 to $14.37 per share.
I do not expect MELI to deliver the same level of outperformance versus market estimates going forward, simply because it is almost impossible to continue obliterating expectations by such a margin from a much larger size.
However, winning businesses tend to keep on winning over the long term, so it makes sense to consider the possibility that MELI could continue doing better than expected over the years ahead. If fundamental performance is going to outperform expectations by a large margin, then the stock is actually cheaper than it seems to be at first sight.
The stock price has appreciated more than 90% from its lows of the year, but it is also still trading more than 40% below the historical highs of more than $2000 per share reached in 2021.
Volatility levels have been amazing in recent years, and MercadoLibre has a lot of room to recover when market conditions improve for growth stocks.
For further details see:
MercadoLibre: Outstanding Performance And Cheap Valuation