Summary
- MELI's partnership with WhatsApp Pay may provide a long-term tailwind in consumer onboarding, further expanding its e-commerce and fintech market share in Brazil.
- The partnership also capitalizes on the growing demand for Instant Payments System, PIX, regularly used by 141.6M Brazilians since its launch in November 2020.
- Notably, MELI's operations in Argentina prove more profitable, with excellent operating margins of 38.4% against Brazil's 13.8%.
- Therefore, an aggressive expansion across Latam is highly possible too, where WhatsApp is used daily by 273.1M consumers.
We previously covered MercadoLibre (MELI) here in December 2022. In its previous FQ3'22 earnings call, MELI reported exemplary top and bottom-line expansion, triggering a sustained stock price recovery of 28.99% since then. The optimistic sentiment is also attributed to the moderation of the inflation rate in Latin America from 6.6% in 2021 to 6% thus far, with 2023 potentially further decelerating to 5.1%. These also fuel Mr. Market's growing confidence about e-commerce's recovery in the region.
For this article, we will be focusing on MELI's partnership with Meta's ( META ) WhatsApp Pay, which may provide a long-term tailwind in consumer onboarding, further expanding its e-commerce and fintech market share in Latam. A public launch may also capitalize on the growing demand for the Instant Payments System, PIX, which has been regularly used by 141.6M Brazilians since its launch in November 2020.
The WhatsApp Pay Partnership May Further Expand MELI's Market Share
The topic was previously covered here , with a focus on Meta's tailwinds on WhatsApp monetization. For this particular article, we will be focusing on MELI's prospects instead.
MELI has a lot to gain from the WhatsApp Pay partnership indeed. By August 2022, Statista reported that the company only accounts for 20.9% of the Gross Merchandise Volume in Latin America's e-commerce sales. This is despite the previous Bloomberg report of 27% market share in Brazil, 68.8% in Argentina, 13.6% in Mexico, 6.3% in Chile, and 9.6% in Colombia by the end of 2021.
On the other hand, WhatsApp has the highest penetration rate in the Latam social media market at up to 90% by 2022 , with Brazil reporting up to 96% (2022), Mexico - 94.3% (2022), and Argentina - 95.2% (2021). As a result, it is unsurprising that MELI decided to partner with Meta, since the latter's dominance in the region makes it very easy for the e-commerce and fintech giant to reach and onboard new customers across its platforms.
We think our positive outlook is easy to agree with, since WhatsApp remains the most widely used social media platform in Brazil with users spending up to 29.2 hours/ month on it, against TikTok at 20.2 hours/ month. On a daily basis, we spend up to 30 minutes on the messaging platform as well.
The new P2B [Peer To Business] payment tool may allow MELI to expand on WhatsApp's existing P2P payment systems . Notably, the beta platform will also allow in-app transactions with Pago's credit or debit cards as well, attributed to MELI's banking license in Brazil .
We posit that the platform may eventually tap into Pago's digital wallet and BNPL services in the future, since the company already offered a similar service for its existing e-commerce users. While loan originations for credit and BNPL may have decelerated by the latest quarter, it is important to highlight that it is likely attributed to the management's decision in de-risking, instead of reduced market demand.
WhatsApp's P2P payment system was previously introduced in 2020 and relaunched in 2021 following authorization from Brazil's Central Bank . MELI's new partnership also capitalizes on the growing demand for PIX, an Instant Payment System launched in November 2020, which already boasts 141.6M users at the time of writing , suggesting an excellent 65.2% fintech penetration in the country.
The rate of PIX's growth has been impressive, with the total number of monthly transactions growing by 1427.3%, from 169.76M in January 2021 to 2.42B by December 2022. Notably, the number of monthly P2B transactions has also expanded by 4161.8% from 14.1M to 588.2M, with P2B monthly payment volume similarly increasing by 1064.8% from 10.7M BRL to 114.1M BRL at the same time (the equivalent of $2.05M to $21.91M, based on the exchange rate of 1 Brazilian Real to $0.19 at the time of writing). These point to the stellar consumer-to-business engagement in the country indeed.
As a result of the increased fintech penetration in the region, it is unsurprising that MELI's Mercado Pago now boasts a Total Payment Volume of $32.2B and 40M unique active users in FQ3'22, growing by 6.6% QoQ/ 76% YoY and 5.2% QoQ/ 26.5% YoY, respectively. While its fintech growth has been impressive, it is important to highlight that the market competition in Brazil is intense, with hundreds of new startups in the past two years.
Therefore, we reckon the low friction partnership may potentially expand MELI's fintech onboarding and margins ahead, especially aided by the 118.5M WhatsApp users in Brazil as of November 2022.
WhatsApp has also introduced a similar service in India, in collaboration with JioMart since August 2022 . The latter's order value and the number of transactions have grown tremendously by 9-fold since launch, with up to 68% comprising repeat consumers . Notably, the platform's catalog similarly expanded by 71% QoQ, especially in the non-grocery category, as its seller base grew by 83% QoQ as well. As a result, JioMart may report a sustained consumer and seller onboarding ahead, considering that the country reports 487.5M WhatsApp users.
For now, Brazil remains MELI's largest revenue driver in Latam at $5.25B over the last twelve months, accounting for 54.3% of its sales. However, its operation in Argentina interestingly delivers a much improved operating margin of 38.4% compared to the latter at 13.8%. Therefore, assuming a similar success in Brazil, we posit that the company may consequently expand the new payment platform across Latam, once the beta platform is launched publicly and gains traction.
Depending on how the partnership progresses, we believe that the tailwinds for MELI's forward execution are tremendous indeed. The e-commerce market in Latam is expected to grow from $111.4B in 2023 to $187.1B in 2027 at a CAGR of 13.84%, with the fintech market similarly expanding at a CAGR of 8% through 2028.
Therefore, we expect to see an upward revision to MELI's forward execution by at least 10%, if not more, based on Jio-Mart's promising expansion in its active consumer base by 37% sequentially . With a wider base than the company's current 42.5M unique buyers and sustained annual e-commerce ARPU of ~$774.1, we think the company may naturally record improved top and bottom-line growth indeed. This is especially made sweeter by the untapped ~80% Gross Merchandise Volume in Latin America's sales thus far.
Based on our aggressive estimates, we think MELI may report stellar FY2025 revenues of $21.8B and EPS of $40.20, triggering an excellent CAGR of 32.56% and 121.50%, respectively. As a result, there is no wonder that it continues to trade at a notable P/E premium, despite the uncertain macroeconomic outlook. This is the reason why we continue to keep a close eye on the stock, due to its massive potential for outperformance over the next decade, despite the notable political risks in the region .
So, Is MELI Stock A Buy , Sell, or Hold?
MELI 1Y EV/Revenue and P/E Valuations
MELI is currently trading at an NTM P/E of 71.09x, lower than its 1Y mean of 92.90x. Based on its projected FY2023 EPS of $14.80 and current P/E valuations, we are looking at a moderate price target of $1.05K. However, it appears that market analysts are more bullish at $1.31K, suggesting a 20.24% upside potential from current levels. This is interesting, given the massive 82.2% recovery from the June 2022 bottom of $600.69.
MELI 1Y Stock Price
The optimism is likely attributed to MELI's highly competent management team and tremendous tailwinds for market expansion if its partnership with WhatsApp Pay proves successful. Therefore, investors with higher risk tolerance and long-term investing trajectory may still consider nibbling here if it consequently reduces their dollar cost average.
However, we prefer to err on the side of caution and rate the MELI stock as a Hold now, due to the reduced margin of safety. The company is expected to report its FQ4'22 earnings as well, providing us with deeper insights into its forward execution by mid-February 2023.
MELI's commentary on Mercado Credito may also provide us with a clearer picture of the consumer's economic health and the subsequent growth of its e-commerce and fintech segments. In FQ3'22, the management guided towards a conscious deceleration in loan originations , due to the increased default potential from high-risk consumers. The prudent strategy has subsequently triggered a greater weight for delinquent loans from prior periods, with the Credito portfolio's total non-performing loan [NPL] ratio rising to 37.0% by FQ3'22 , compared to 31.4% in FQ2'22 and 27.6% in FQ1'22 .
Then again, MELI has also competently expanded its reliance on third-party funding, tempering some of the macroeconomic headwinds while demonstrating the market's growing confidence in its forward execution. External funding on its Credito portfolio had grown to 59% by FQ3'22, compared to 52% in FQ2'22 and 39% in FQ3'21. As a result of these factors, we reckon the management has been executing brilliantly indeed.
For further details see:
MercadoLibre: Partnership With WhatsApp Could Help Grow Market Share