What if I told you that you could invest in a company that's like Amazon (NASDAQ:AMZN), PayPal (NASDAQ:PYPL), Meta (NASDAQ:META), Shopify (NYSE:TSX:SHOP), and much more, all in one? That's Mercado Libre. The company offers an integrated ecosystem of e-commerce and digital financial services, including the Mercado Libre Marketplace, the Mercado Pago fintech platform, the Mercado Envios logistics service, Mercado Ads, Mercado Libre Classifieds, Mercado Shops, Mercado Play, Mercado Credito, and Meli AIR.
Based in Latin America, a region with over 650 million people, Mercado Libre benefits from one of the fastest-growing internet penetration rates and booming e-commerce growth worldwide.
The Full Ecosystem
Source: Mercado Libre
The Commerce Side
At the core of Mercado Libre's operations is its e-commerce marketplace, which has evolved to address the unique challenges of the Latin American market. While often compared to Amazon, Mercado Libre's Marketplace is more tailored to the nuances of the region, combining online retail with a range of supporting services designed for both buyers and sellers.The company monetizes the marketplace in two main ways: first-party sales (1P) and third-party sales (3P). In 1P, Mercado Libre sells products directly to customers, sourcing goods from manufacturers or distributors and handling storage and shipping. In 3P, the company acts as a marketplace, with merchants responsible for shipping their own products.
This is where Mercado Envios comes in. Its in-house logistics solution stands as a key differentiator. Through this service, Mercado Libre has managed to significantly reduce delivery times while expanding its reach to underserved areas. This service is critical in Latin America, where transportation infrastructure is less developed than in other regions. To address this, the company has been investing in its own cargo fleet, Meli Air, which provides greater control over shipping and expands delivery efficiency across countries where infrastructure can be a challenge.
In addition, Meli Places provides a network of physical locations where buyers and sellers can drop off and pick up packages, enhancing accessibility for users who might not have reliable home delivery. Users can pick up and drop off packages relatively close to their homes and at a time that fits their schedule.
Mercado Libre Classifieds further diversifies the platform, allowing users to list and purchase vehicles, real estate, and services. Classified listings differ from marketplace listings in that they only charge optional placement fees, not final value fees. The Classifieds section also drives traffic to Mercado Libre's platform, benefiting both its commerce and fintech businesses.
Meanwhile, Mercado Ads offers merchants the opportunity to directly advertise their products to Mercado Libre's vast audience. This provides additional revenue streams as businesses pay to have their products featured prominently on the platform.
The Fintech Side
Mercado Shops is another strategic part of Mercado Libre's ecosystem. This platform allows small and medium-sized businesses to create their own digital storefronts, powered by Mercado Libre's infrastructure. Through Mercado Shops, sellers can manage inventory, handle payments, and access Mercado Envios for logistics, all while benefiting from Mercado Libre's extensive customer base. Similar to Shopify, this service helps merchants create customized e-commerce experiences without the hassle of building and maintaining their own infrastructure. However, by enabling sellers to integrate seamlessly into Mercado Libre's wider ecosystem, Mercado Shops provides businesses with tools to scale efficiently in an increasingly digital economy.Mercado Pago started as an internal payment processing solution but has since become a cornerstone of Mercado Libre's business. It addresses one of the biggest barriers to e-commerce in Latin America: limited access to banking services. Mercado Pago allows users to make payments, send money, and even invest, all without needing a traditional bank account. The platform's digital wallet functionality has grown beyond Mercado Libre's marketplace, becoming widely adopted across the region.
Mercado Credito, another crucial part of Mercado Libre's fintech strategy, extends credit to consumers and businesses, promoting greater financial inclusion in Latin America. The company has an advantage here: when a user shops on Mercado Libre, they can request a loan directly from Mercado Credito, avoiding the need for a traditional bank. For merchants, Mercado Libre uses sales data to assess creditworthiness and quickly offer loans. Additionally, the company can charge commissions on sales as a form of payment for the loan, reducing the risk of default. This gives Mercado Credito a competitive edge over traditional banks, as it has lower customer acquisition costs and better credit underwriting capabilities, allowing it to offer more attractive interest rates.
These initiatives not only generate additional revenue for Mercado Libre but also increase participation in the digital economy, enabling both buyers and sellers to access affordable credit.
Lastly, beyond its core services, Mercado Libre is continually expanding its ecosystem. Mercado Play, a relatively new initiative, offers free streaming content on the platform.
FinancialsMercado Libre has demonstrated remarkable growth across its core businesses, as reflected in its financial performance. Over recent periods, the company's revenues have consistently increased, reaching $5,073 million in Q2 2024, representing a year-over-year (YoY) growth of 41.50%. The company has gained more than 5x its revenue in the last 4 years, underling the company's ability to expand its marketplace operations and fintech services despite challenging macroeconomic conditions in Latin America.
Source: FinChat
One of the key measures of Mercado Libre's e-commerce success is its Gross Merchandise Volume (GMV), which reached $12,647 million in June 2024. GMV grew by 20.40% compared to the same period last year, highlighting the increasing number of transactions on the platform. This growth is further supported by the rise in the Number of Successful Items Sold, which saw a 29.50% YoY increase, reaching 421 million items in June 2024. Meanwhile, the Number of Items Shipped grew to 416 million, a 30.40% increase from the previous year.
In terms of profitability, Mercado Libre's Gross Profit reached $2,365 million in Q2 2024, reflecting a Gross Profit Margin of 46.60%. The company's gross margins have narrowed over the years. I don't see it as a red flag because it is due to an adjustment of its business model. Mercado Libre is no longer solely focused on e-commerce, but now it controls the full vertical, from warehousing to distribution. On a positive note, the bottom line has been expanding since it bottomed in 2019 showing Mercado Libre's scale potential, which is crucial given the significant investments required for scaling its logistics and payment infrastructure.
The Net Income Margin improved to 8.2% in the last twelve months, driven by operational efficiencies and economies of scale across its growing business segments. The company's Earnings Per Share (EPS) increased to $10.50 in Q2 2024 from $6.8 the previous year.
Source: FinChat
Mercado Libre's fintech arm, Mercado Pago, has also been critical role in driving the company's financial performance. The platform's Fintech Monthly Active Users reached 52 million in June 2024, marking a 37.20% YoY increase. This growth in active users has further boosted the company's transaction volume as more individuals and businesses across Latin America adopt digital payment solutions.
In terms of its balance sheet, Mercado Libre's cash and short-term investments stood at $6,891 million, while its debt was only $5,403 million, providing a strong financial buffer for future expansion. Mercado Libre's Free Cash Flow (FCF) reached $1,698 million in June 2024, with an FCF Margin of 33.50%.
Finally, Mercado Libre has kept its shareholders satisfied with minimal dilution. The company's stock-based compensation is modest, accounting for only about 1% of revenue. Additionally, Mercado Libre has periodically repurchased shares, and with its profitability on the rise, the pace of new share issuance is expected to slow. In 2023, the company spent $167 million on stock buybacks and returned another $356 million through additional share repurchases. As profitability continues to improve, further buybacks could be expected under favorable market conditions.
Challenges in Latin AmericaDespite its dominance, Mercado Libre is not without risks, particularly given the volatility of the Latin American region. The company operates in markets prone to economic instability, including frequent currency fluctuations, high inflation, and unpredictable regulatory environments. These issues are especially prominent in key markets like Brazil and Argentina, where rapid devaluation of local currencies could have a direct impact on Mercado Libre's earnings.
Moreover, while Mercado Pago and Mercado Credito have made significant strides in expanding financial inclusion, they also introduce inherent credit risk. In regions where economic conditions can shift rapidly, there is always the possibility of higher default rates on credit products, which could pressure Mercado Libre's margins. This credit risk is a common concern in regions where access to traditional financial services is still limited, leading many to rely on digital alternatives like Mercado Credito.
Political instability is another persistent concern. In many of the countries where Mercado Libre operates, changes in government, regulatory policies, or even social unrest can disrupt operations. Although the company has proven to be well-managed and capable of navigating these challenges, some disruptions could be particularly expensive to work around, potentially impacting growth rates and margins.
ManagementMercado Libre is a founder-led company, guided by CEO Marcos Galperin, who founded the company in 1999. Galperin has been instrumental in shaping it into the e-commerce and fintech powerhouse it is today. One curious story of Galperin's leadership is that he went up against eBay (NASDAQ:EBAY). Despite eBay being one of Mercado Libre's earliest investors, eBay tried to compete with Mercado Libre in Latin America, but Galperin's leadership outplayed it. His ability to manage the company through political and economic volatility in the region is a testament to his leadership skills as the company remains the dominant player in the region.
Moreover, Galperin is highly aligned with shareholders, holding approximately 7.2% of the company's shares. His substantial ownership stake demonstrates his long-term commitment to the company's success, as I value a leadership team with skin in the game.
While Galperin's leadership has been exceptional, particularly in guiding Mercado Libre to become a powerhouse in both e-commerce and fintech, he temporarily stepped down from his role as President in 2020 due to political shifts in Argentina. This move was more of a precautionary step in response to the political climate but demonstrates the risks associated with operating in volatile markets like Argentina.
ValuationMercado Libre is a broad company operating in several distinct industries, making a simple multiple comparison less appropriate. In my opinion, a sum-of-the-parts analysis, which breaks down each segment and compares it to Mercado Libre's peers, is a more accurate way to value the company.
Source: Author
However, before diving into the segmental breakdown, it's worth comparing Mercado Libre to Amazon as a whole. Mercado Libre is trading at a price to sales (P/S) of 6.1x, with a forward P/S of 4.6x, and a forward price to earning (P/E) of 46.9x. In comparison, Amazon trades at approximately half of Mercado Libre's multiple. On a direct comparison, Mercado Libre carries more risk due to its geographical location which should warrant a lower multiple, which isn't the case. However, Mercado Libre is projected to grow its revenue by 42% next year, with a compound annual growth rate (CAGR) of 31% over the next two years. Amazon, on the other hand, is only expected to grow by 11% annually, which might justify Mercado Libre's premium.
Looking at the PEG ratio both trade at 1.7x, suggesting they have similar valuation profiles when factoring in growth. When it comes to price to free cash flow (P/FCF), Mercado Libre trades at 18.5x compared to Amazon's 40.7x, underscoring how powerful Mercado Libre's FCF is relative to another e-commerce giant. However, it's important to note that Amazon has been heavily investing in AI, which has impacted its FCF.
From a sum-of-the-parts perspective, and compared to its peers in each category, Mercado Libre appears to be fairly valued. That said, I would argue that Mercado Libre should command a higher premium due to its dominant position in Latin America. While the region carries geopolitical risks, it also creates significant barriers to entry, making it difficult for competitors to penetrate the market, thereby reinforcing Mercado Libre's dominance.
Source: Author
Lastly, it is worth noting that the sum-of-the-parts analysis here is based on sales, but other metrics, such as earnings or cash flow, could yield different results.
The Best is Yet to COmeMercado Libre has created a complete ecosystem with a well-diversified business model, drawing revenue from various streams. While each individual segment has worthy competitors, it is the ecosystem that enhances Mercado Libre's moat. This comprehensive ecosystem creates strong switching costs for merchants, as they rely on Mercado Libre for everything from operations to marketing, logistics, and credit. Similarly, consumers benefit from an integrated experience across multiple services.
The geographical location of Mercado Libre in Latin America may be seen as a risk due to the region's volatility, political uncertainty, and currency risk. However, it can also be viewed as an advantage, as the region's complexities create high entry barriers for potential competitors.
Looking forward, there's still significant growth for the company to explore, both in underpenetrated markets and in its core offerings. Financials are looking strong.
Currently, Mercado Libre is the top holding stock in my portfolio, as such, I don't plan on adding more at these levels. However, if I didn't already have such significant exposure, I would consider starting with a small position at this price, and then look to add more during any market weakness until I reached full exposure.
And to conclude with Mercado Libre's motto: the best is yet to come.
This content was originally published on Gurufocus.com
