MercadoLibre Inc. (MELI, Financial) is an Argentina-based e-commerce company that is considered “the Amazon of Latin America.” The beauty of this company is it has continued to grow in the thriving emerging markets and has plenty of runway ahead.
What does MercadoLibre do?
MercadoLibre's business consists of its core e-commerce, of which it is a market leader across three main countries, Argentina (68% market share), Brazil (27% market share) and Mexico (13.6% market share), according to data from Bloomberg.
As a whole, MercadoLibre’s website generates a staggering 667 million visits per month, compared with just 169 million for Amazon.com Inc. (AMZN, Financial).
The company also has a second major growth engine, which is its rapidly growing fintech segment, Mercado Pago. This includes a digital account, which users can add funds to via transfer or even cash via a physical store.
This is an especially lucrative opportunity in Latin America, given paper-based cash still makes up 87% of payments in Argentina, compared to just 28% in the U.S., according to data from McKinsey.
The company also offers a range of credit card solutions under it Mercado Pago brand. In the second quarter, MercadoLibre launched its credit card program for Mexico. In addition, the company launched its insurance solutions in Mexico, which is a product category with low penetration in the region. The business is starting with simple cellphone insurance, digital account coverage, etc., but this is expected to be extended to personal accident coverage and more areas.
This builds on top of Mercado Pago’s full payment solution for merchants, which offers the fastest settlement times and fee discounts relative to competitors.
Mercado Pago offers a complete payment solution to these merchants, combined with the fastest payment settlement in the market and competitive receivables discount rates. Merchants can also access credit lines directly via the service, which offers another lucrative credit stream.
Roaring financials
MercadoLibre reported solid financial results for the second quarter of 2023 on Aug. 2. Its revenue of $3.42 billion beat analyst forecasts by $143.8 million and increased by 31.5% year over year.
Keep in mind this is during a cyclical pullback in e-commerce globally, with companies such as Amazon reporting stagnating growth.
The top line was driven by solid gross merchandise volume growth of 47% year over year. This was supported mostly by growth in Brazil and Mexico, which surpassed Argentina to become its second-largest commerce geography. This is surprising given the higher competition in Mexico from giants such as Amazon and even Walmart (WMT, Financial).
Its brand consideration in Brazil reached an all-time high, which is a testament to its leading market position. This is believed to be a key driver of its GMV in the country, which rose by 25% year over year on a foreign exchange-neutral basis.
Breaking down Mexico in further detail, its total number of items sold in the quarter grew by 34% year over year. This was driven by its highest level of new buyers in the past two years and a hugely successful “Hot Sale” event.
MercadoLibre’s competitive advantage or moat is its vast fulfillment network penetration, which increased by over 10% year over year. This enables strong adoption in same-day and next-day delivery, which is a positive value proposition for consumers. In Mexico specifically, MercadoLibre opened two new fulfillment centers in the second quarter, one in Mexico City and the other in Merida.
Argentina has continued to face many macroeconomic challenges and a tightening in the supply of goods. Despite this, its GMV growth (on a foreign exchange-neutral basis) accelerated by 119% year over year.
Fintech accelerates
MercadoLibre’s fintech segment reported 129% year-over-year growth in its total payment volume. This was driven by strong growth access both Brazil and Mexico. The company has continued to roll out its “smart” point of sale system in Mexico this year. The business targets larger merchants, which generate high total payment volume, in the long term. This technology also enables merchants to offer payment-based installments to buyers, which really means the company can benefit from the growth in buy now, pay later options.
Mercado Pago reported an 80% increase in the number of users for its investment product. Through offering an attractive interest rate, this has become the largest retail money market fund in the country which is hugely surprising for an e-commerce company.
Advertising continues to grow
The company also has a thriving advertising business, which generated 70% revenue growth for the fifth successive quarter. This was driven by an increase in the number of sellers using its product ads service as well as bidding process improvements.
Margins and balance sheet
Moving on to profitability, MercadoLibre reported revenue of $558 million, which rose by 123% year over year.
This was driven by solid top-line growth and operating expenses reducing by 5.8% as a portion of revenue. The profitability was also enhanced by its highest margin services, namely ads and credits. The credit business specifically reported $150 million in operating income for the second quarter, up from $100 million in the prior year.
Taking a step back, its gross margin also reported a slight (0.8% year over year) improvement as a portion of revenue. This was driven by efficiencies derived across its collection fees and fewer POS devices.
MercadoLibre has a robust balance sheet with $3.3 billion in cash and short-term investments. In addition, it reported total debt of $5.5 billion, of which the vast majority ($2.4 billion) is long term.
Valuation
MercadoLibre trades with a price-sales ratio of 5.74, which is lower than its five-year average.
Based on historical ratios, past financial performance and analysts' future earnings projections, the GF Value Line also indicates a fair value of around $20,71 per share. As such, the stock appears to be significantly undervalued at the time of writing.
Guru interest
Many guru investors, including Ark Invest's Catherine Wood (Trades, Portfolio) and Ken Fisher (Trades, Portfolio), reduced their positions in MercadoLibre by between 20% and 26% in the second quarter.
However, growth stock fund Baillie Gifford (Trades, Portfolio) increased its position by 4%. The stock traded for an average price of $1258 per share during the quarter.
Final thoughts
MercadoLibre is truly the “Amazon of Latin America." However, instead of having a rapidly growing cloud business, it has a fintech growth engine. This is expected to continue to benefit from the huge unbanked population in Latin America, while its e-commerce business also continues to thrive. The company looks to have a local advantage over competitors such as Amazon, and thus looks to be a great potential long-term opportunitiy.
