MercadoLibre Is Latin America's E-commerce Leader

Of all the industries out there, possibly my favorite is the e-commerce space.

Yes, I know - cloud enterprise software is probably a close second!

E-commerce is just so gargantuan. In the U.S. alone, it has grown from just 4% of total retail sales in 2010 to about 14.5% in 2022. That's about $1 trillion annually.

Most analysts expect this trend to continue. There was a big jump in 2020 due to COVID, and the past 2 years have seen some leveling off. But going forward, analysts are predicting U.S. e-commerce to exceed 20% of all retail sales within the next 5 years. That would represent another $350-500 billion dollars!

The U.S. is not even the most developed e-commerce market. China already generates a quarter (25%) of total retail sales from online sources.

Few industries in the world offer such ripe growth opportunities.

The company I'm highlighting today is a e-commerce player in less developed markets. It has already shown itself to be a leader, and has expanded its business to several portions of the e-commerce value chain. The stock market has started to recognize its potential, but not nearly enough. There are still big opportunities going forward.

Let's take a look at MercadoLibre (MELI).

Latin America's Amazon... And PayPal... And...

MercadoLibre runs the largest e-commerce and digital payment platforms in Latin America. The company organizes its business into 2 reporting segments.

The Commerce division is 55% of sales and has a few pieces to it:

The second division is Fintech, about 45% of sales. Fintech consists of:

Brazil is the company's largest operating territory, generating 55% of sales. Argentina is 25%, and Mexico 17%. Mercado Libre operates in 15 other countries, but combined they represent only 3% of sales. Chile comprises the bulk of that figure.

Plenty Of Growth And Solidly Recurring Revenues

This is a compelling revenue model.

MercadoLibre has delivered fabulous sales growth, with a 3 year compound annual growth rate (CAGR) of 70%! There are some currency effects in there, but even the hard metrics are impressive. Items sold have a 3 year CAGR of 43%. Items shipped 52%. Payment transactions an incredible 79%!

Any way you look at it, the company's growth has been explosive.

I see no reason outstanding growth rates cannot continue. Looking at just Brazil, e-commerce penetration today is only about 7-8%, vs. the 15% we mentioned earlier for the U.S., or 25% for China. That is a LOT of upside potential even assuming a static GDP. Over the longer term, I expect to see these rates rise to more global norms. Argentina and Mexico are similar stories.

MercadoLibre has also shown a willingness to aggressively pursue ancillary opportunities for revenue. Mercado Pago was considered an add-on service at first... now it is their largest single revenue generator! It will be interesting to see what other new ideas come out of the firm to grow it even more.

It is a rising tide that the company is riding. I see little reason to think MercadoLibre cannot continue top line growth at 20% or better for the foreseeable future.

The marketplace and payment network models are highly attractive from a recurring revenue perspective, too. Both of these are "toll collector" businesses, pocketing a small fee from every transaction that takes place on them. The same merchant will pay the company multiple times daily, and sometimes multiple times per transaction (e.g. marketplace fee, shipping fee, payment processing fee)!

It doesn't get more recurring than that! I love the revenue characteristics here.

All About The Network

Sometimes it is difficult to identify a moat characteristic, even for firms that clearly have them.

That is certainly not the case here.

Mercado Libre is a classic NETWORK EFFECT business. Sellers choose to list their products on the marketplace, because that is where they can reach the most buyers. Buyers shop on Mercado Libre because that is where the best variety of sellers are. This creates a flywheel of growth that - once past a certain scale - is very difficult for competitors to match.

Mercado Pago possesses a similar network effect on the payment side. Like PayPal, a lot of people have Mercado Pago accounts simply from buying and selling on Mercado Libre, and that large base of users makes it attractive to off-marketplace vendors as an accepted form of payment. As more vendors add it, its utility increases to consumers, driving more demand.

Both of these have enough scale to claim the network effect, too. Mercado Libre is the largest e-commerce site in Brazil with over 260 million monthly visitors, more than twice the next largest. Mercado Pago processes 5 billion transactions a year, making it the second largest mobile wallet in Brazil (behind Samsung Pay).

To be clear, there is plenty of competition for everything MercadoLibre does. Sea Limited's Shopee and SeaMoney are similar businesses making a hard push into Brazil. StoneCo, Samsung, Google, and PayPal compete on the payments side. Even so, remember - e-commerce is an ENORMOUS opportunity. There is plenty of room for multiple big winners.

Leadership and Financial Stuff

By now you might know that I like founder-led companies, right? Guess what? MercadoLibre is yet another one!

Marcos Galperin founded the company in 1999 when he was still at Stanford University. Over his 23-year tenure, he has adeptly steered it from nothing into a $45 billion dollar juggernaut that is on top of Latin America's burgeoning e-commerce market. In the process, he has stared down (and defeated) the likes of eBay and Amazon.

I don't see Galperin going anywhere, anytime soon. He is still relatively young for a CEO at 50 years old. Through his trust, he maintains 8% financial ownership of the company, today worth roughly $3.8 billion.

Under his leadership, MercadoLibre has not only grown, but has grown profitably and efficiently. Free cash flow margins have averaged 17% over the past 5 years, which I see as a reasonable expectation for this kind of business. Cash returns on invested capital read at close to 40%, which is just fantastic. The company has taken on a bit more debt that I would like to see over the past 3 years, but not to such an extent that it threatens any business stability.

Risks

I don't like Mercado Credito - the firm should have just bypassed this initiative. We saw a lot of inexperienced e-commerce players over the last few years dive headfirst into the consumer lending space. And now they are getting whacked. It's what happens when you have no experience in a complicated industry and make assumptions based on a historically low rate environment.

MercadoLibre is not immune. In the most recent quarter, a full 37% of their loan portfolio was under-performing (delinquent). With close to $2 billion in loans on the books, this is my biggest concern.

The other major risks I see are geopolitical. Latin America in general has a volatile history economically, with a high reliance on commodity prices and generally weak economic governance policies. We've seen wild booms and busts there over the years, massive inflation, currency de-valuations, credit crunches, etc. It is a somewhat risky place to do business.

Any of these has the potential to really put a dent in MercadoLibre's stock price.

Conclusion

While there are some risks to watch, overall I really like the investment case for MercadoLibre. It is a major player in a massive and growing market, has a strong competitive position, and is well-managed. It gets the "green dot" stock nod and will be added to the Watch List! Check out the MELI stock page for our thoughts on valuation and what a is a good price to buy at (members).