MercadoLibre (“MELI”) – The Investor Weekly Stock Report

Summary

MELI is down about 43% over the past month. And it has been beaten down about 20% since January 01, 2022. The selloff is really the result of a broader tech selloff due to fears of slowing growth and various macro factors.

The stock still looks very attractive relative to its growth potential.

MELI presents a unique opportunity in combining e-commerce and FinTech to historically underbanked countries. And this allows the company to continuously expand into new businesses, while already being the Amazon of Latin America.

There is a chance MELI may fall more, but this price point represents a great opportunity for a long-term  (multi-year) hold. MELI’s long-term growth potential remains intact.

MELI’s stock is cheap enough to compensate for macro conditions and a competitive environment.

MELI is a giant player in several important growth markets in a region that is still early in the migration process. Remember that less than 70% of Latin America is currently online. When you consider the size of the middle class, now and in the future, the addressable market is encouraging.

Company Profile – What does MELI do?

MercadoLibre, Inc. operates online commerce platforms in Latin America. It operates Mercado Libre Marketplace, an automated online commerce platform that enables businesses, merchants, and individuals to list merchandise and conduct sales and purchases online; and Mercado Pago FinTech, a financial technology solution platform, which facilitates transactions on and off its marketplaces by providing a mechanism that allows its users to send and receive payments online, as well as allows users to transfer money via their websites and mobile apps.

The company also offers Mercado Fondo that allows users to invest funds deposited in their Mercado Pago accounts; and Mercado Credito that extends loans to certain merchants and consumers.

In addition, it provides Mercado Envios logistics solution that enables sellers on its platform to utilize third-party carriers and other logistics service providers, as well as fulfillment and warehousing services for sellers. Further, the company provides Mercado Libre Classifieds, an online classified listing service, where users can list and purchase motor vehicles, real estate, and services.

Additionally, it offers Mercado Ads, an advertising platform, which enables large retailers and brands to promote their products and services on the Internet.

The company also provides Mercado Shops, an online storefronts solution, that enables users to set-up, manage, and promote their own Webstores. The company was incorporated in 1999 and is headquartered in Buenos Aires, Argentina.

Valuation – Is the current sales multiple justified?

At present, there is no major risk to justify this low valuation.

MELI is at its lowest Price / Sales ratio in five years (~8.0x). And I expect strong growth over the next three to five years. I believe the company is a good buy all the way to its traditional 10-12x Price/Sales ratio that it has historically had.

Declining Profitability – Should you be concerned?

Although it isn’t overly profitable, the company has an established history with over ten years of operating experience. The most apparent reason for the selloff in MELI is declining margins. However, I believe this is part of a longer-term trend where margin expansion is sacrificed for revenue growth.

Although Gross Margins and Operating Margins have decreased materially since 2008, the downtrend is offset by revenue growth. The product / service mix has changed for the company and this explains the drop. MELI has invested aggressively in lower margin areas like fulfillment, first-party sales, FinTech and payments.

So while Operating Margins have declined about 70% over the last five years, Revenue growth has accelerated by about 60%.

MELI has returned an impressive 1080% over the past five years (Price Return).

Historical Volatility

MELI has had multiple declines in the -40% range from a historical perspective. Investors must be able to stomach volatility with this stock, as returns are not free. In retrospect, these past selloffs have all proven to be excellent buying opportunities. There are strong reasons to believe that the recent downturn is proving to be an excellent entry point for the stock.

Concerns – Inflation and Brazil’s Macroeconomy

MELI has a presence in 18 different Latin American markets, but Brazil, Argentina and Mexico account for the largest share of its business. Conditions are unstable in Latin America. Inflation in places like Argentina remain an ongoing concern. Fortunately, Argentina makes up less than ¼ of MELI’s revenue and  inflation levels appear to be more tame in places like Brazil and Mexico. MELI generates over half its revenue in Brazil. There are, however, some fears that Brazil’s market is struggling; potentially even entering a period of recession.

The company breaks down its revenue growth rates by US dollars as well as local currency, and there’s typically a significant difference. MELI is growing so quickly that even the lower growth from the US perspective is still impressive, but the political and inflationary risks remain tangible considerations.

The bottom line is that there is great risk in LATAM than in developed markets. And this risk is exacerbated if governments and sociopolitical forces remain unstable.

Increased Competition

Market share has remained stable, but new competitors like Sea Limited (SE) continue to enter the region.  MELI has fended off big challengers like Amazon before, but Sea Limited’s Shopee, which is the Southeast Asian leader that entered Latin America in late 2019, has been a resilient challenger. Last August, Shopee overtook MELI as the region’s top e-commerce app in terms of monthly active users.

Other competitors include Facily, Sou Barato, and Alibaba’s AliExpress.

MELI was able to hold off major competitors in the early years when the Latin American e-commerce market was in its nascent stages.  However, the company has now moved into fintech, fulfillment, credit, and even asset management. And in these markets, it will continue to invite competition.

New entrants will benefit from strong tailwinds including 4x lower e-commerce penetration in LATAM than in developed markets and faster GDP growth than developed markets.

What else are the bears saying?

MELI is facing challenging year-over-year comparisons. Coming out of the pandemic of 2021, rising expenses, aggressive competitors, and macroeconomic headwinds have the potential to limit MELI’s gains this year. The company’s year-over-year growth in gross merchandise volume (GMV), total payment volume (TPV), unique active users, and total revenue all decelerated significantly over the past two quarters.

Getting Back to our Bullish Thesis

On a two-year basis, MELI’s GMV rose at a compound annual growth rate (CAGR) of 73% in the third quarter, compared to a CAGR of 74% in both the first and second quarters of the year.

During the Q3 2021 conference call, CFO Pedro Arnt said its e-commerce marketplace experienced “higher levels of engagement with increasing transactions per unique buyer sequentially,” gained more buyers “compared to the periods before the pandemic,” and achieved “better retention levels” for all of its buyers.

Morgan Stanley expects the region’s e-commerce penetration to rise from 9% in 2021 to 16% in 2025, then gradually climb to 50% over the next several decades. This would indicate that there is also plenty of room for MELI, Sea, Amazon, and Alibaba to expand in Latin America. As the first mover in this growing market, MELI’s scale, logistics network, and Mercado Pago payments platform give it significant advantages against its challengers.

Mercado Pago – The Latin American equivalent of PayPal or Block’s Square

Just as PayPal once primarily leaned on former parent eBay to generate leads that it could turn into digital transactions, Mercado Pago relies on MELI’s online marketplace to build its audience. But if you compare the total payment volume of nearly $21 billion on Mercado Pago to the $7.3 billion sold through MELI’s internet storefront, you’ll see that it’s three times larger now. Payment volume for Mercado Pago has soared almost 50% in U.S. dollars over the past year.

Other MELI Businesses – This isn’t a one-trick pony

Mercado Envios shipped 247million items for the quarter, a 32% increase in volume. MELI successfully sold 259million items, a 26% increase, so this is another segment that’s growing faster than the flagship e-commerce hub. Mercado Credito, MELI’s credit platform for merchants and consumers, has seen its credit portfolio grow four-fold to $1.1 billion over the past year. And its asset management product, Mercado Fondo, has $920 million in assets under management with 21 million users.

Price Target

Analysts have a price target of roughly $1965, which implies greater than 80% upside. Analysts are expecting rapid EPS expansion in the next few years. If MELI continues to deliver on the 30% EPS growth trajectory that analysts expect, this price is well supported.

The EV/Revenue ratio is below 10.0x. This is close to its minimum level in ten years. And on a forward looking basis, EV/Revenue is almost 6.0x. This shows how undervalued this stock may potentially be at the moment. Both trailing and forward ratios remain at historical lows.

MELI – The bottom line

MELI faces a lot of near-term challenges, but from an investor’s prospective, it remains the a well balanced stock to profit from the long-term growth of Latin America’s e-commerce and fintech markets. Its core business is healthy, its expansion plans remain sound, and its valuations are attractive. 

References
MacroTrends
https://www.macrotrends.net/stocks/charts/MELI/mercadolibre/stock-price-history

MercadoLibre Investor Relations
https://investor.mercadolibre.com/

Nasdaq
https://www.nasdaq.com/articles/why-mercadolibre-twilio-and-uipath-fell-hard-in-january

Seeking Alpha Premium
https://seekingalpha.com/symbol/MELI

The Motley Fool
https://www.fool.com/investing/2022/01/24/why-mercadolibre-shopify-and-sea-stocks-crashed/

https://www.fool.com/premium/company/NASDAQ/MELI/

YCharts
https://ycharts.com/companies/MELI

Disclosure
I am/we are long MELI either through stock ownership, options, or other derivatives. 

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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