If you are not familiar with MercadoLibre (ticker: MELI), I suggest you should read my post of “Latin America’s e-commerce dominant MercadoLibre“
Rately keep growing
The company’s impressive growth rate has put MercadoLibre on the radar of many investors. Over the past few years, it has been common for the company to see revenue growth of at least 30% annually. In the most recently reported first quarter of 2024, total revenue grew 36%.
MercadoLibre is also starting to see this revenue growth take its position further down the income statement. In the first quarter of 2024, operating income increased by 26%, net profit increased by 71%, and the company generated US$5 billion in free cash flow in the past 12 months.
Antifragile
This kind of company is rare
In the investment world, “antifragility” means that a company becomes stronger in the face of challenges, and MercadoLibre is undoubtedly a rare company that can fit this description.
Latin America is not easy to run
MercadoLibre only operates in Latin America, where countries often face difficult regulatory environments, political instability and high inflation. However, MercadoLibre did not back down from these challenges and turned these difficulties into business opportunities.
Diversified business
MercadoLibre is a leader in Latin America in many areas. These areas have also helped MercadoLibre become a leader in e-commerce and other fields in Latin America. When MercadoLibre launched its sales platform in 1999, online shopping was still in its infancy.
While its e-commerce marketplace is its largest division, it also offers fintech products as well as different divisions in logistics, advertising and other business-diversified services, all of which operate well.
e-commerce
Steady business
After adjusting for the impact of currency exchange rates, total merchandise volume (i.e., the total dollar amount of merchandise sold) on the e-commerce marketplace platform grew 71% in the first quarter of 2024. Growth of 30% based on 28% in the first quarter of 2023.
This was true as total sales increased 25% in the first quarter, while unique active buyers increased 16%. Overall, MercadoLibre continues to attract new customers who buy more over time.
Covering whole Latin America
MeradoLibre is Latin America’s leading e-commerce company, operating in 18 countries in Central and South America.
Logistics
Necessary for e-commerce
Its logistics arm, Mercado Envios, has found success in the same way. Ultimately, it provides express delivery services for third-party businesses selling goods on MercadoLibre.
Extremely successful
Likewise, MercadoLibre’s logistics business unit, Mercado Envios, has established itself as market leader in Central and South America. While U.S. consumers may now take same-day or next-day delivery for granted, prior to Mercado Envios, no such service existed in Latin America.
Fintech
Purpose from the beginning
When it started selling goods online, the vast majority of people in its marketplace were cash customers and couldn’t buy on the MercadoLibre e-commerce platform. Rather than accept the situation, it created Mercado Pago to provide products and services that enable people to conduct digital transactions. The fintech business was so successful that it also opened the platform to customers who didn’t buy from MercadoLibre.
Business is impressive
Mercado Pago, the company’s fintech arm, began as a way for marketplace users to pay for goods. Over time, it has evolved into a more comprehensive banking and payment option for users.
In the first quarter of 2024, monthly active users of financial technology increased by 38%. Total assets under management grew 90% to $5.5 billion, and the credit portfolio grew 46%.
These indicators indicate that Mercado Pago is quickly becoming more valuable to its customers. What’s more, there are fewer financial products available in Latin America than U.S. investors are used to.
Of these additional offerings, fintech business Mercado Pago is the fastest-growing and most important for investors to pay attention to. It accounts for approximately 42% of total revenue.
Competitors do not have this advantage
Furthermore, even if Amazon were able to gain a greater foothold in Latin America, it would not be able to offer fintech services. Therefore, with Mercado Pago, it will likely never achieve the market leadership that MercadoLibre achieved. Additionally, fintech largely didn’t exist when Mercado Pago was founded. Its decision to become a fintech provider to other businesses has made it the fintech market leader in the region.
Competitors
E-commerce rivals
MercadoLibre’s e-commerce competitors include:
- Amazon (ticker: AMZN): please see my post of “Amazon vs. Alibaba“
- Alibaba (ticker BABA): please see my posts of “Why is Alibaba spin-off unanimously optimistic?” and “Amazon vs. Alibaba“
- Shopee (ticker: SE), a subsidiary of Sea: please see my post of”Sea, the parent company of Shopee, the most valuable company in Southeast Asia“
- Shein: please see my post of “How does Shein, the world’s fastest growing fast fashion seller, make money?“
Fintech rivals
MercadoLibre’s fintech competitors include:
- Nubank (ticker: NU): For details, please see my post of “What company is Nubank owned by Buffett? How it makes money and its advantages?“
- StoneCo (ticker: STNE) is a Brazilian payment fintech player.
- PagSeguro (ticker: PAGE): Brazil’s payment fintech player.
- Cielo SA (ticker: CIOXY): Cielo is Brazil’s largest credit card and debit card operator. Founded in 1995, it is a partnership between Visa (ticker: V) and Bradesco, Banco do Brasil, Banco Real (now Banco Santander) and a joint venture with the now-defunct Banco Nacional bank.
Capital market performance
The stock price is relatively cheap
Considering all of the company’s strengths, MercadoLibre stock is trading at a price that many consider reasonable, which may surprise investors.
Some investors may disagree with that assessment: At a price-to-earnings (P/E) ratio of 73 times, it’s not cheap. That P/E is much higher than Amazon (43x) or Alibaba (22x). In the first half of 2024, its revenue increased by 39% year-on-year to US$9.4 billion.
But please note that MercadoLibre is not just delivering such results now. Its importance is that it can continue to deliver exciting results for many years. Its revenue grew by 37% in 2023 and 49% in 2022, when the epidemic still hindered many offline businesses.
Additionally, MercadoLibre turned profitable in 2021, with net income growth increasing since then. In the first half of 2024, net profit rose 89% to $875 million. Its revenue growth is so high that its price-to-earnings-to-growth (PEG) ratio is just under 0.9. Any stock with a positive PEG ratio below 1 is generally considered undervalued. There are value investors who are also more likely to continue buying MercadoLibre stock despite its high P/E ratio.
MercadoLibre is reasonably priced
MercadoLibre currently trades at a price-to-sales (P/S) multiple of 5.6 and a price-to-free cash flow (P/FCF) multiple of 17. In comparison, these valuations are not particularly expensive.
Amazon, for example, has 3x sales and 42x free cash flow. Additionally, MercadoLibre’s price-to-earnings estimate is also cheaper than its five-year median.
Related articles
- “MercadoLibre that Amazon cannot beat. Why it keeps delivery?“
- “Latin America’s e-commerce dominant MercadoLibre“
- “What company is Nubank owned by Buffett? How it makes money and its advantages?
- “Why is Alibaba spin-off unanimously optimistic?“
- “Amazon vs. Alibaba“
- “Sea, the parent company of Shopee, the most valuable company in Southeast Asia“
- “How does Shein, the world’s fastest growing fast fashion seller, make money?“
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