MercadoLibre (NASDAQ:MELI) reported earnings for the third first quarter of 2020 on Tuesday, May 5, and the numbers were clearly outstanding. The company outperformed expectations, and the main indicators in both e-commerce and fintech look clearly healthy. Importantly, MercadoLibre still has enormous potential for growth going forward, and the bullish thesis for the stock looks stronger than ever.
MercadoLibre Keeps Firing On All Cylinders
No company is immune to the global recession produced by the COVID-19 pandemic, but the online commerce and fintech leader in Latin America is clearly sailing through the storm well.
Management said in the conference call that MercadoLibre was seeing strong demand in the first quarter of 2020 until the business started feeling the impact of the lockdowns in March, especially in big markets such as Brazil and Argentina. However, demand was already rebounding in April.
The company also experienced some shifts in demand trends, with categories such as health, consumer packaged goods, and toys and games performing strongly while non-essential categories saw marked declines in growth rates.
In the fintech segment, the company observed a deceleration in volume payments processed by mid-March, mostly due to lower foot traffic in brick and mortar retailers that use MercadoLibre's MPOS and QR solutions. The negative impact was partially offset by strength in areas such as online payments merchant services, online wallet use cases, and convenience store merchants.
By the end of the quarter, the nonperforming loan ratios in the fintech segment had not shown any deterioration due to the crisis, but the company still slowed credit originations to both merchants and consumers to reduce risk exposure in an uncertain context.
In order to secure liquidity, the company is drawing on credit facilities at a local subsidiary level, and the consolidated balance sheet currently holds approximately $2.3 billion in cash and liquid securities.
CFO Pedro Arnt remains confident on the company's prospects for the rest of the year, even while facing some unprecedented conditions:
Summing up where we stand, we’ve seen three phases: a strong start to the first quarter, that got derailed during the back half of March, and rebounded by April. Given these recent trends, we remain optimistic that, despite everything that has been occurring, we will still be able to make progress towards our annual objectives, without having to delay or materially modify our investments or strategic initiatives
The numbers for the quarter were clearly strong. Unique active users grew 30.9% reaching 43.2 million at the end of the quarter. Items sold reached 105.7 million, growing 27.6% year-over-year, and mobile gross merchandise volume grew 197.6% year-over-year on a currency-neutral basis.
Total payment volume (TPV) through Mercado Pago reached $8.1 billion, a year-over-year increase of 43.5% in U.S. dollars and 82.2% on a currency-neutral basis. Total payment transactions increased 102.0% year-over-year, totaling 290.7 million transactions for the quarter.
Net revenues for the first quarter were $652.1 million, a year-over-year increase of 37.6% in US dollars and 70.5% in currency-neutral terms. The number surpassed Wall Street expectations by $43.63 million. MercadoLibre reported a GAAP net loss per share of -$0.44, beating expectations by $0.03 per share.
Massive Potential Ahead
At a price to sales ratio of nearly 15 times revenue, MercadoLibre is not particularly cheap. However, the stock is not too expensive either when compared to other high-growth companies in the market.
Even more important, MercadoLibre still has massive room for sustained growth in the years ahead, so the stock is still offering plenty of upside potential going forward.
Online commerce in Latin America accounts for 3% of total retail sales versus 10% in the U.S. According to data from eMarketer, the e-commerce industry in Latin America is expected to grow at a compounded annual rate of 19% from 2015 to 2021, and MercadoLibre is positioned as the main beneficiary from this trend.
Large shares of the population in Latin America have insufficient access to bank accounts and to financial services in general, so the company is operating in a fertile growth environment with massive unaddressed needs and enormous room for sustained innovation.
Source: Source: MercadoLibre
The population size in Latin America is a massive opportunity of over 650 million people, and both online commerce and financial services are clearly underpenetrated markets in comparison to China and the U.S. These numbers show that MercadoLibre still has enormous potential for growth in the long term.
In order to put some numbers in perspective, the table below shows market capitalization and annual expected sales for MercadoLibre versus Amazon (AMZN) and Alibaba (BABA). MercadoLibre is still remarkably small in comparison to its peers. Based on market capitalization, MercadoLibre is 5% the size of Alibaba and 2.4% the size of Amazon.
|Market Cap ($Bn)||Annual Sales ($Bn)|
Data source: Seeking Alpha
Importantly, both Amazon and Alibaba keep growing at an impressive speed in spite of their gargantuan sizes. Amazon reported a 26% increase in revenue last quarter and Alibaba increased revenue by 38% in the fourth quarter of 2019. In industries such as online commerce and fintech, even market leaders with a gargantuan scale can enjoy vigorous growth rates.
With a much smaller size and revenue base in comparison to the world giants, and also operating in a region where online commerce and fintech are barely getting started, MercadoLibre should be able to sustain vigorous growth rates over the years and even decades ahead.
Risk And Reward Going Forward
MercadoLibre operates across different countries in Latin America, and currency fluctuations in those countries can severely affect the company's financial statements when translated to U.S. dollars. This factor is well-known and understood by the analysts following the stock, but it still makes it difficult to accurately forecast financial performance.
The company's marketplace division is quite profitable from a structural perspective, but MercadoLibre is aggressively investing for growth in fintech, while also consolidating its competitive position with loyalty programs and free shipping offerings. These investments make a lot of sense since they are planting the seeds for sustained growth over the long term, however, profit margins have been under pressure in recent quarters.
Many analysts have expressed concerns about the potential risk that a competitor such as Amazon or Alibaba could mean for MercadoLibre. But this has not been a major issue for the company so far. In fact, MercadoLibre is facing tougher competition from small local players than big global competitors.
Due to tariffs, entangled regulations, and all kinds of logistical challenges to international trade in Latin America, MercadoLibre has a unique marketplace site for each country in the region. Trying to expand in these countries on a case-by-case basis would be no easy task for a global player such as Amazon and Alibaba and chances are that these companies would consider buying MercadoLibre instead of fighting an uphill battle in MercadoLibre's home markets.
In addition to the fundamental risk factors, MercadoLibre's stock is quite volatile, as can be expected from a high growth business in Latin America. If you are looking for slow and steady returns, MercadoLibre is not the best choice for you, although this volatility can also create remarkably attractive buying opportunities for bargain hunters from time to time.
Those risk factors being acknowledged, MercadoLibre is clearly firing on all cylinders during challenging times, and the company has enormous potential for future growth if management keeps executing well. The long-term upside potential should more than compensate for the risk and the volatility in the stock going forward.
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Performance as of May 6, 2020