Buy MercadoLibre, The eBay Of Latin America

Jul.10.12 | About: MercadoLibre, Inc. (MELI)

MercadoLibre (NASDAQ:MELI) has shown an annual earnings growth of 85% for the last 5 years. It is the largest online e-commerce company in Latin America, which provides buying, selling, advertising, and transaction services to more than 70 million people in Brazil, Mexico, Argentina, Venezuela, and other Latin American countries. The company strategically partnered with eBay (NASDAQ:EBAY) in 2000 to receive financial support and take benefit of eBay's global expertise in online commerce business. As a result, eBay owns an 18% stake in MercadoLibre. In the absence of eBay in Latin America, MercadoLibre can be termed as the "eBay of Latin America".

The company offers a marketplace to buy and sell, new and used goods, on fixed prices or auctions. MercadoLibre has also developed an online payment system called MercadoPago (similar to PayPal) to support financial transactions on the MercadoLibre marketplace. The company also derives a part of its revenues from selling advertising spaces on the MercadoLibre website through the MercadoClics program. Moreover, MercadoLibre introduced MercadoShops in 2010 to provide users a platform to setup and manage online web stores.

The company draws nearly half of its revenues from Brazil. Argentina, Venezuela, and Mexico are also major contributors to MercadoLibre revenues. Over the years, the business exposure towards Brazil has reduced with rising exposure in Argentina and Venezuela.

Geographic Revenue Mix

2009

2010

2011

1Q2012

Brazil

53.90%

56.70%

55.50%

50.40%

Argentina

15.50%

18.40%

19%

21.60%

Venezuela

15.80%

9.60%

11.60%

13.40%

Mexico

8.90%

8.80%

7.50%

7.90%

Other Countries

6%

6.50%

6.40%

6.70%

Total

100.10%

100.00%

100.00%

100.00%

Click to enlarge

Stock Drivers

  • Registered Users Growth.
  • Gross Merchandise Volume, Items Sold.
  • Total Payments Volume, Total Payment Transactions.
  • Economic Growth/Slowdown in Latin American countries, especially Brazil.
  • Entry of eBay in Latin America.
  • Suspension, Disruption, Interruption of Services causing loss of Customer Confidence.

Industry

The global Online Retail Industry has grown by an average of 13% in the past five years. Latin America is the fastest growing region for e-commerce with a 17% five years' average growth rate. China, Brazil, Mexico and Chile are considered to have great potential for online retailing. According to the Economist Intelligence Unit, 80 million internet users of Brazil spend an average of $10 billion each year on internet shopping. Improving living standards of the middle class, along with higher levels of internet penetration in Latin America, are expected to boost the Online Retail Industry in the near future.

Financial Review

MercadoLibre 1Q2012 revenues grew by 35% YOY to $83.7 million, however, the company was unable to meet analysts' revenue growth expectations. Analysts were expecting $84.27 million of revenues in 1Q2012. Still the company posted strong revenue growth from Marketplace, Advertising, and Payment Systems. Total number of registered users grew by 25% YOY to nearly 70 million. Gross Merchandise Volume, a key sales metric that indicates the dollar sum of all transactions on the Marketplace, rose by 38% YOY to nearly $1.3 billion in 1Q2012. Payment Systems also posted an impressive growth with the total payment volume, a key payment metric, which indicates the dollar sum of all transactions conducted via MercadoLibre MercadoPago, soared by 51% YOY in 1Q2012 to $370 million. The company has been successfully able to integrate MercadoPago payment services with MercadoLibre Marketplace, as the proportion of gross merchandising volume on MercadoLibre Marketplace transacted via MercadoPago payment services increased from 27.4% in 1Q2011 to 29.7% in 1Q2012.

Three month ended March 31, (in MM)

2012

2011

%YOY

Total confirmed registered users at the end of period

69.5

55.6

25.00%

New confirmed registered users during the period

3.6

2.7

36.60%

Gross merchandise volume

$1,321.70

$954.00

38.60%

Items sold

15

10.9

38.10%

Total payments volume

$370.10

$245.20

50.90%

Total payments transactions

4.9

2.6

84.60%

Click to enlarge

Gross profit margins, however, are showing a declining trend as a result of higher collection fees from increasing penetration of MercadoPago payment services in gross merchandising volume sold. Operating expenses grew by 29% YOY to $24.9 million and net income grew by 39% YOY to $19.6 million. MercadoLibre generated free cash flow of nearly $12 million in 1Q2012.

Retail activity is seasonally slow in the first quarter of the year and fastest in the fourth quarter. However, MercadoLibre had a strong first quarter in 2012, compared to 1Q2011 and 1Q2010. Therefore, it can be concluded that growth for MercadoLibre has not slowed down.

Year-on-Year Local Currency Revenue Growth Rates by Quarter

YoY Growth rates at previous years exchange rates

Consolidated Net Revenues

Q1'10

Q2'10

Q3'10

Q4'10

Q1'11

Q2'11

Q3'11

Q4'11

Q1'12

Brazil

35%

26%

7%

15%

22%

15%

38%

39%

29%

Argentina

67%

62%

48%

52%

33%

37%

55%

70%

85%

Mexico

25%

19%

11%

12%

11%

7%

14%

31%

35%

Venezuela

59%

69%

61%

57%

58%

39%

57%

64%

66%

Others

47%

24%

14%

22%

22%

32%

37%

35%

34%

Total

45%

39%

23%

25%

26%

22%

41%

46%

44%

Click to enlarge

Valuation

We expect MercadoLibre to take full advantage of growth in e-ecommerce in Latin America, as the emerging Latin economies thrive and online shopping trends among consumers increases. MercadoLibre is currently trading at 26 times forward earnings compared to eBay, which is trading at a 43% discount at 14 times forward earnings. Historically, MercadoLibre has grown at a higher rate than eBay and Amazon (NASDAQ:AMZN). Furthermore, the stock offers attractive PEG compared to Amazon and eBay.

We believe that due to the impressive growth prospects of MercadoLibre and lower business risk due to sole leadership in Latin American e-commerce market leadership, it should trade at a higher P/E multiple. Therefore, we recommend buying the stock.

In US Dollars

MELI

EBAY

AMZN

Market Cap (intraday)

3.29B

52.22B

100.72B

Forward P/E (fye Dec 31, 2013)

26.35x

14.82x

87.07x

PEG Ratio (5 yr expected)

1.23

1.31

5.65

Operating Margin (TTM)

32.82%

19.88%

1.42%

Total Debt/Equity (mrq)

0.1

11.14

0.0

Earnings Growth Past 5 Years (per annum)

83.87%

7.12%

7.28%

Expected Earnings Growth Next 5 Years (per annum)

28.15%

13.25%

32.65%

Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.