MercadoLibre Stock Analysis & Deep Dive

Just another Amazon of South America or is there more to be discovered?

Nov 25, 2023

Intro

A lot of companies get the “the next Amazon” label attached. Most of the time the label is unjustified since Amazon is in a realm of its own. A couple of companies come to mind, where the label could be justified. Among those are the South-Korean Coupang and the subject of this deep dive: MecadoLibre. I wanted to learn more about the company and understand if this could be really a (local) version of the next Amazon.

The Company

MercadoLibre is based in Uruguay, (from now on I shall refer to it as Meli) and is the largest e-commerce ecosystem in Latin America and is present in 18 countries. Meli was founded in 1999 and splits its business into six different segments. These are Mercado Libre Marketplace, the Mercado Pago Fintech platform, the Mercado Envios logistics service, the Mercado Ads solution, the Mercado Libre Classifieds service and the Mercado Shops online storefronts solution.

This picture shows how it all started and it reminds me of the famous photo of Jeff Bezos in the starting days of Amazon sitting on this desk with the amazon.com banner next to him. Today Meli is one of the five largest companies by market cap in South America.

The majority of the more than 40,000 employees are based in Brazil (40%) and Argentina (25%). In 2022 alone, Meli hired 10,000 additional people. 40% of the staff are working in the shipping department and the remaining 60% fulfill office roles. The employees outside of the shipping department are free to choose where to work from and Meli offers up to 100% home office in order to attract talent across the continent.

The Industry

Latin America / South America is an often overlooked geography in business. With more than 650 million people and one of the fastest-growing e-commerce rates, it provides ample opportunity. As of 2020, Latin America was a rather small market on the global scale with strong projected growth in e-commerce.

Meli is dominating the market and will profit strongly from the projected growth.

The Business

Meli classifies its businesses into two segments: Commerce and Fintech.

Commerce:

The Mercado Libre Marketplace is very similar to the Amazon store that we know in the West. This is the landing page for the Argentinian store.

The Mercado Envios logistics solution is very similar to the fulfillment by Amazon (FBA) solution. Third-party sellers can use this service for warehousing and fulfillment services.

Just like the big brother Amazon, Meli has their air fleet called Meli Air which covers routes across Mexico and Brazil to shorten delivery times. In total, almost 80% of all shipments were delivered within 48 hours to the customer.

Mercado Libre invierte en México para fortalecer su logística y estrena un Boeing 737-400

Other products include:

an online listing service where users can list and purchase motor vehicles, real estate and services.
a digital storefront solution for users to create their own digital stores
a loyalty program called Meli Mas which you either activate through points or by paying for it. You will get discounts on shipping, access to third party video content like Disney+ (hello Amazon Prime), higher interest rates on savings accounts and many more.

This video gives a good overview of Meli’s commerce business:

Mercado Ads is an advertisement platform, which enables companies to use the wide reach of the Meli marketplace to show advertisements for the products. When you consider that Amazon is one of the largest advertisers now, this move to copy the business makes perfect sense.

As of Q1/23: “Our advertising business continues to grow rapidly across geographies, with revenue as a percentage of GMV reaching 1.4% in Q1’23. This is up 30bps year-on-year on a much higher GMV base, which shows that Ads revenue growth - which remained consistent with prior quarters at 62% year-on-year in US dollars - continues to significantly outpace GMV growth”. As of Q3/23: “Revenue from our advertising services grew above 70% on an FX-neutral basis for the sixth quarter in succession, and is now equivalent to almost 1.7% of GMV”

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Fintech:

To facilitate payments in the marketplace, Meli started Mercado Pago, an integrated payment solution. Mercado Pago was first an exclusive solution for Meli’s marketplace but has since been developed to also facilitate payments between registered Meli customers. Think of it as a local version of PayPal. On top of that, merchants can also use a branded or white-labeled version of Mercado Pago to facilitate the whole payment and checkout process on their website. This is similar to the “pay by Amazon” checkout button which you can find on many websites today.

To serve offline sales as well, Meli also offers point-of-sales solutions and pay by QR-code in traditional offline stores. As you can see, within Meli, there is a whole full-fledged payments provider, similar to what Fiserv is doing. Meli also thought a couple of steps ahead and you can also get debit cards through which users can spend the money stored on their Mercado Pago wallet. Merchants and consumer credits, extended warranty policies and even buying cryptocurrencies are possible with Mercado Pago as well.

In Q2/23: “We have seen improvements in perceptions of Mercado Pago as a “one-stop shop” for financial services”. In Argentina, Mercado Pago is so popular, that it hosts the the largest retail money market fund in the country.

Mercado Credito is a credit provider in Argentina, Brazil, Mexico and Chile which has the goal to increase the lock-in effect of existing customers. Through the many data points that customers leave through buying items on the platform, Meli has a good understanding of the creditworthiness of their customers.

Now you may wonder: What else is Meli doing? Meli also offers an asset management platform, which enables users to use their Mercado Pago account similar to a bank account. Meli claims, that the return for funds held is higher than on traditional bank accounts and customers can use their funds to buy items online and offline or just withdraw the money from an ATM. Considering that unlike in Western Europe or North America, many consumers are under-banked, this is a great way to open new customer demographics and tie them to the Meli ecosystem.

The Fintech segment which mostly consists of Mercado Pago generates revenues through commissions for payment processing and fees and interest generated through loan issuance. The Fintech segment has shown even more tremendous growth than the already fast-growing Commerce segment.

The growth of the total payment volume (TPV) has been nothing short of astonishing.

From Q1/23: “As we highlighted in our Q4’22 Shareholder Letter, we believe that we now have the critical mass of services necessary for users to be able to have their principal financial services relationship with Mercado Pago. The objective of this long-term strategy is to develop a deeper relationship with our 44mn quarterly unique active fintech users, a user base that continued to grow at almost 25% year-on-year in Q1’23. For example, our Insurtech and Savingstech services are showing some positive early signs (albeit still small scale) and if we succeed in our strategy, we expect that these products should gain further traction.” The number of unique fintech users grew from 41.6m in Q3/22 to 48.8m in Q3/23.

Meli’s credit portfolio continues to grow and increased by $628m from Q3/22 to Q3/23. More than half of the credit portfolio is consumer credit. The credit card business shows strong growth. The net interest margin after losses is very high and shows the earning power of this segment.

The table below shows the rollout of the services in the different counties. Meli is expanding all across Latin America. As of today, only Argentina, Brazil, Mexico and Chile have access to all four services. Over time Meli will roll out the solutions across the other countries as well. There is still a large untapped potential waiting for Meli.

The Management

The founder and CEO Marcos Galperin is the richest man in Argentina and as of this writing just 52 years old. Through his trust, Marcos Galperin owns 3.8m shares of Mercadolibre, which is 7.6% of all outstanding shares. These shares are worth $5.8bn and show a serious commitment from Galperin. The new CFO Martin de los Santos joined Meli in 2007 and has led the credit business before taking the position as CFO in August.

Risks

One of the largest risks is the interference of a government. Latin American countries are famous for their instability in political leadership and Meli addresses the risk itself in the 10K report “Latin American governments have exercised and continue to exercise significant influence over the economies of the countries where we operate. This involvement, as well as political and economic conditions, could adversely affect our business.”. Another risk factor is: “Local currencies used in the conduct of our business are subject to depreciation, volatility and exchange controls.”

“Because we conduct our business outside the United States and receive almost all of our revenues in currencies other than the U.S. dollar, but report our results in U.S. dollars, we face exposure to adverse movements in currency exchange rates.” “For the year ended December 31, 2022, 53.8% of our net revenues were denominated in Brazilian Reais, 23.7% in Argentine Pesos and 17.7% in Mexican Pesos”.

The Argentinian Peso knows only one direction and the currency is losing value at an insane pace. As of October 2023, inflation reached 142% in Argentina. This depresses the profit made in Argentina and therefore impacts the overall USD-denominated profit from the Argentinian business. Over the last five years, the Peso has lost 90% of its value to the USD.

The credit business can be adversely affected by defaults. Meli has $1.1bn allowances for doubtful accounts, with the majority coming from consumers. Consumer doubtful accounts increased from 232m in 2021 to 614m in 2022.

These doubtful accounts originate from the Loan receivables, where 39% of all loans are doubtful (!). These high doubtful claims are being covered by the high interest rate which is being paid by the non-doubtful customer cohorts. This is typical for Latin America, as this headline from Bloomberg indicates: “Brazilian Senate Passes Bill to Limit Credit Card Interest Rates at 100% Amid Soaring Debt”.

On the positive side, it must be noted, that the average consumer credit has a duration of just 2.1 months and the exposure per user is 166$. If the consumer loan business would turn sour, Meli can wind it down in a very fast way.

In Q2/23 Meli stated: “This gives us confidence that our underwriting for this product has improved, and is enabling us to increase issuance of cards.” Meli is currently increasing its footprint in the credit card business and has started offering this service in Brazil and Mexico. The total payment volume of the credit cards surpassed $1bn for the first time in Q3/23. As taken from the Q3 investor letter: “The credit card is in an investment phase as we begin to scale the product, which is a key piece of our long-term strategy to be the financial services provider of choice for users of our ecosystem.”

What gives me confidence in Meli is the strong ecosystem and the many touch points that Meli has with its customers. Meli has a lot more data points to judge the risk profile of a certain individual compared to a traditional bank. Therefore Meli can choose the more creditworthy customers.

The Fundamentals

While the number of active users grew only by 11% from 2020 to 2022, the GMV grew by 16.5% and the number of items shipped went up by 70%. This indicates the already existing user basis continues to order more and more on Meli’s platform. In software business, you would say that the net retention rate is >100%. Total payment volume increased 2.5-fold.

Similar to Western retailers, Q4 is by far the strongest quarter for Meli, followed by the weakest quarter (Q1).

Meli is growing as fast as bamboo (fun side fact: some species of bamboo can grow as much as 89cm per day). Q3/23 revenues were up 69% on FX neutral basis, the operating margin increased from 11% in Q3/22 to 18.2% in Q3/23. This combined with the increased revenue more than doubled the income from operations. Gross merchandise volume grew by +59% to $11.4bn and total payment volume (TPV) by +121% to $47.3bn.

In Q3 “Income from operations reached $685mn, growing 131% YoY to hit a new quarterly record”. The next sentence reminds me a lot of the Amazon shareholder letters: “Strong margin performance reflects our ability to leverage our scale as we maintain high rates of growth, combined with many years of consistent investment in technology”

The overall growth of revenue, operating income and net income is bananas. Keep in mind, that we are looking here at quarterly figures and not annual numbers.

Almost every single metric, both financial and non-financial is trending in the right direction. There are more unique active users and higher GMV for the commerce business as well as higher TPV and NIMAL (higher net interest margin after losses) for the Fintech segment.

The year-over-year growth rates are nuts. I’ve chosen the local currency growth rates since the USD growth rates paint especially for Argentina a “darker picture”. In Q3/23 Argentina achieved +180% in net revenue growth in local currency vs just 22% growth in USD. The Argentinian Peso is devaluing at a rapid pace. More on that in the Risk segment of this analysis. The growth of Off-Platform total payment volume is astounding and keeps accelerating.

Similar to Amazon, Meli keeps investing and is building up its logistical footprint with new fulfillment centers but manages to keep capital expenses relatively low. Meli’s interest income increased strongly in the last quarters. This is mostly due to the funds stored by the users in the Mercado Pago wallet.

Summarizing the fundamentals on a multi-year horizon you can see the growth best:

Valuation

Meli is valued at an EV/FCF of 18.4 and an EV/Net Income of 77.5. Especially the EV/Net Income is not cheap as of today. Considering the strong underlying growth and a forward P/E of 48, you can see how the underlying fundamentals put the seemingly high valuation into perspective.

Summary

After diving really deep this time, I can say, that MercadoLibre is not just another Amazon, but it seems to be a combination of Amazon, Paypal, Visa, eBay and a traditional bank. To put it in blunt terms: Meli is a different kind of beast. Since I started working on this deep dive, Meli’s share price increased from 1200$ to now 1530$. At the same time, the shares are still at an attractive level considering how strong and profitable Meli is growing.