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MercadoLibre: Strong Growth Despite Argentina Issues

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About: MercadoLibre, Inc. (MELI)
by: The Prospector
The Prospector
Long only, Growth
Summary

MercadoLibre reported another strong quarter of revenue growth.

Revenue growth in Mexico more than tripled, and the company continues to perform well there despite competition from Amazon.

The MercadoPago payments solution continues to grow quickly and is becoming an important payment processing solution both on the company's marketplace platform and off.

With shares 30% off all-time highs, the company looks overvalued by traditional valuation metrics. But the company's explosive revenue growth and strong competitive position in Latin America makes it appealing.

There are risks, but I remain long.

Thesis

MercadoLibre (MELI) reported another quarter of stellar revenue growth in its three biggest markets: Brazil, Argentina, and Mexico. Though the company continues its explosive revenue growth, losses widened in the quarter as it invested in marketing and paid deferred taxes owed in Mexico and Colombia.

MercadoLibre is the leading online shopping resource in Latin America and is generally referred to as the Amazon of Latin America. Though Amazon (NASDAQ:AMZN) has a competitive operation in Mexico and recently entered Brazil, MercadoLibre has a dominant and growing marketplace business in the region that has been bolstered by a booming payments business. Though the company's obsession with growth at the expense of margins might scare some investors away, MercadoLibre continues to have a massive runway for growth in the region and remains a buy.

Source

Q3-19: More Strong Growth, And More Investment

MercadoLibre's core business is its online marketplace. This is what the company's foundation was built on nearly two decades ago. But in recent years the company has expanded its business to meet the needs of both consumers and businesses that sell on the platform. In addition to the Marketplace, the company also provides payment processing services, logistics services to get packages to customers, classified advertising service, business advertising service, and online storefront service for merchants.

The payments service, MercadoPago, has become an increasingly important business for the company. Initially, MercadoPago was offered on the Marketplace to facilitate transactions. The solution evolved to help merchants process transaction off the Marketplace as well.

Source

For the first time in company history this quarter, payments processed off the Marketplace actually exceed those on it. The company processed $7.6 billion in payments in Q3, $4 billion of which was offline. The $7.6 billion in payment was a 66% increase over Q3-18.

The Marketplace itself continued to see strong growth. Gross merchandise volume totaled $3.6 billion, representing a 22% increase in dollars. Items sold on the Marketplace reached 98 million, posting a 17.3% increase over last year.

Source

While the continued strong growth in Q3 came at a higher operating cost, the company says much of that cost can be attributed to increased marketing to promote the Marketplace and MercadoPago. The company is focusing on building the MercadoPago brand beyond its use on the Marketplace to help realize the full potential it sees to becoming an increasingly larger player in payments processing market.

Growth continues to be the company's focus. The company wants to use its scale and capital to gain users, then monetize those users, and then build out a sustainable business.

Source

The Amazon Prime Threat in Brazil

On the call, the company was asked how much of its Brazil business was impacted by the recent launch of Amazon Prime in Brazil. The company does not see any indication that Amazon's foray into the Brazilian market has a negative impact on MercadoLibre's growth prospects. Brazil is MercadoLibre's largest market from a revenue standpoint. Mexico is MercadoLibre's third largest market, where Amazon has more of an established presence than in Brazil. And in Q3 in Mexico, MercadoLibre saw its revenue grow nearly 150%. It remains to be seen what kind of traction Amazon can make in both Brazil and South America in general.

Valuation

On the surface, MercadoLibre's valuation is terrifying. By any traditional valuation metric, the company looks grossly overvalued, even now that's trading 30% off its all-time highs.

But MercadoLibre has a lot of advantages. It is the clear leader in online retail in Latin America. Amazon is taking steps to encroach on the market, but the Latin American market is complicated, and MercadoLibre has a big head start. Like Amazon, MercadoLibre has always traded at a nosebleed valuation due to its consistently torrid revenue growth rate. The company has evolved in recent years to become a major payment processor in its markets and continues to see strong growth on its Marketplace.

Source

There will always be external risks facing the company. Several of the countries in which the company operates - Argentina recently - could face economic problems that provide headwinds for the company. That said, the company has dealt with these challenges in the past, continues to achieve torrid growth, and has a strong balance sheet that consists $3 billion in cash and investments.

Conclusion

MercadoLibre is likely to remain a leading hyper-growth commerce and payments investment in Latin America for the foreseeable future. The selloff in recent months provides a good entry point for long-term investors.

Disclosure: I am/we are long MELI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long AMZN.