Summary
- MercadoLibre is a leading ecommerce company in Latin America.
- The company had a strong third quarter of 2022, beating analyst expectations for earnings.
- MercadoLibre's Fintech segment increased its revenue by a blistering 115% year-over-year, and unique active users surpassed 40 million for the first time.
MercadoLibre, Inc. ( MELI ) is a leading ecommerce company that is known as the "Amazon of Latin America" but with a few key differences. The company is a fraction of Amazon's (AMZN) size with a ~$43 billion market cap vs. Amazon at $1 trillion. In addition, Amazon has a thriving cloud business while MercadoLibre has a rapidly growing Fintech business. Despite these discrepancies, MercadoLibre has found its niche as the leading e-commerce player in Latin America. The company beat earnings estimates for the third quarter of 2022 and has a huge growth runway ahead. In this post I'm going to break down the company's third-quarter results in granular detail, before revealing its valuation, let's dive in.
Third Quarter Breakdown
MercadoLibre generated solid financial results for the third quarter of 2022. Revenue was $2.69 billion, which increased by 45% or a rapid 61% year-over-year on a constant currency basis. Despite being known as the "Amazon of Latin America," MercadoLibre is well diversified across its two growth engines, Commerce and Fintech. Its Commerce segment makes up ~54% of total revenue or $1.47 billion, up 33% year-over-year (FX-neutral). The Fintech segment made up ~46% of revenue or $1.225 billion and increased by a blistering 115% year-over-year (FX-neutral). In previous posts on MercadoLibre, I have highlighted that the Fintech segment has high growth potential due to the large unbanked population in Latin America, now it looks as though my thesis is playing out spectacularly. I will now dive into each segment of the business in turn, before diving into its overall profitability.
MercadoLibre Revenue (Q3 Earnings Report)
Marketplace
MercadoLibre's Marketplace segment generated solid growth in the third quarter of 2022. Gross Merchandise Value ((GMV)) increased by a rapid 32% year over year. This was driven by strong growth of 87% in Argentina, followed by solid growth of above 20% across the board. Its "Other" segment, which I'm assuming consists of the smaller markets in Latin America, reported a 20% decline year-over-year, but MELI is not known to have a strong position in these markets.
The three largest economies in Latin America are Brazil, Mexico, and Argentina, we are seeing growth in these three markets, so that is a strong positive overall. This growth looks to have been driven by strong investments in these regions, which have helped to boost service and the value proposition overall.
MercadoLibre (Q3,22)
Unique buyers reached a record high of 42.5 million, up ~10% year over year, with successful items purchased per buyer at ~6.7, level with prior quarters. Overall, I would like to see the number of items purchased by each buyer increase year over year, which could be roughly translated to "Average order value," but given the macro headwinds, the figures reported are still solid. I forecast an uptick in the fourth quarter to at least 7.1, similar to Q4 2021, as the holiday season approaches.
MercadoLibre 2 (Q3 Earnings Report)
MercadoLibre has steadily increased its investments in its Ads business, which was gone from 0.9% of GMV in 2021, to 1.3% in Q3,22. The advertising business has huge potential to be another revenue driver. As a comparison, Amazon has built out a successful advertising business that captures over 14% of U.S. digital ad spend. This segment makes a staggering $31 billion in revenue per year for Amazon. To give you an idea of scale, this equates to ~73% of the entire market capitalization for MercadoLibre at $43 billion.
Mercado Envios (Logistics)
Similar to Amazon, MELI's value proposition is not just an e-commerce website, it stems much deeper to a vertically integrated logistics network. The company has an incredibly high network penetration of 92% across Latin America, with 55% of customers having same-day or next-day delivery available, which is a solid value proposition. Building out a complex logistics network often requires huge capital investment, therefore, I believe this acts as a barrier to entry to competitors and thus is a competitive advantage.
Logistics 1 (Q3 Earnings Report)
By region, Mexico and Chile reported the strongest gains in 48-hour delivery, and network penetration in Mexico is now 96%, the largest of any region. MercadoLibre has set up ~7,000 Meli Places which enable easy pickup and drop off of items. In addition, the company partnered with Brazilian Airline Gol Linhas Aereas Inteligentes S.A. (GOL) to reduce shipping times to the northeast region.
Logistics 2 (Q3 Earnings Report)
Fintech Growth Engine
MercadoLibre's second major growth engine is its Fintech segment, called "Mercado Pago," where Pago means Payment in Spanish. Total Payment Volume ((TPV)) increased by 54% or a blistering 76% year-over-year (FX-neutral) to $32.2 billion.
Its QR code payments and Digital Accounts showed the highest growth in total payment volume. The number of unique active fintech users surpassed 40 million, a record high. Its Mobile Point of Sale (MPOS) segment showed stable growth across regions, with the company gradually moving upmarket with the sale of its devices.
In Mexico, MELI is still in its early stages of growth for its Fintech platform and thus offers plenty of runway ahead for growth.
Fintech (Q3 earnings report)
Credit Portfolio
MercadoLibre's credit portfolio named "Mercado Credito" is another key element of MELI's growth strategy. Latin America has a large unbanked population, and thus extending services to credit offers huge potential. As of the third quarter of 2022, the company's credit portfolio was worth $2.8 billion, with ~55% of this being in Consumer credit, followed by 25% in Merchant Credit and 20% in Credit Card. Given the rapidly deteriorating economic conditions, MELI's large exposure could be a risk. The good news is management took the "deliberate decision" to slow originations due to this weaker environment.
Credit Portfolio (Q3 Earnings Report)
Overall Profitability and Expenses
MELI generated Gross Profit of $1.35 billion at a 50.1% margin. Operating expenses were just over $1 billion, which made up 39.1% of revenues. This was 4.3pp higher due to a growth in "doubtful accounts" related to its credit portfolio, of which management has responded to rapidly.
The company's overall operating margin reached 11.0%, which increased by 240bps year over year. This was driven by higher operating leverage across the business. Earnings per share were $2.56, which beat analyst expectations by $0.24.
Operating Margin (Q3 Earnings Report)
Balance Sheet
MELI has improved its cash position by $343 million quarter-over-quarter. The company had $3.77 billion in cash, cash equivalents, and long-term investments as of Q3,22. The business has ~$2.48 billion in long-term debt with just $360 million of this current debt (due within the next 2 years), thus manageable.
Cash/Balance Sheet (Q3 Report)
Advanced Valuation
In order to value MercadoLibre, I have plugged the latest financial data into my valuation model. I have forecasted a conservative 29% revenue growth rate for next year, due to economic uncertainty. Then I applied a 30% revenue growth rate over the next 2 to 5 years.
MercadoLibre stock valuation (created by author Ben at Motivation 2 Invest)
In order to improve the accuracy of the valuation, I have capitalized the company's R&D expenses. This has caused the business's operating margin to increase to over 22%.
MercadoLibre stock valuation (created by author Ben at Motivation 2 Invest)
Given these factors, I get a fair value of $1,457 per share, at the time of writing the stock is $870 per share and, therefore, is over 40% undervalued.
As an extra data point, MELI trades at a Price to Sales ratio = 4.1, which is 62% cheaper than its 5-year average.
Risks
Recession/Credit Portfolio
As a data point, the largest economy in Latin America (Brazil) reported real Q2 GDP stronger than consensus forecasts. However, the World Bank believes "significant downside risks remain," due to the rising interest rate and high inflation environment. Brazil's inflation rate was 8.73% in August and 7.17% in September, the trend is downwards, which is a great sign, but this is still fairly high. MELI has a large Credit business, and has recently seen a spike in those lenders with debt due over 90 days, although the company has taken action, this is a risk I have highlighted many times.
Final Thoughts
MercadoLibre is a tremendous company that truly is the Amazon of Latin America. It has two main growth engines, which include its e-commerce segment and fintech segment. In addition, its vast logistics networks offer a moat against competitors such as Shopee (SE), which is gaining popularity but often has longer shipping times. MercadoLibre stock is undervalued at the time of writing, and thus could be a great long-term investment.
For further details see:
MercadoLibre: Outstanding Quarter And Undervalued