Mercado Libre is at the centre of e-commerce and fintech disruption in Latin America. Operating leading services in an online marketplace, e-commerce shop builder, logistics, digital advertising, and payments.
Mercado Libre is a leader of large secular trends in the region of Central and South America posting explosive revenue growth across all segments. The market penetration of e-commerce and digital payments is still early days in the region providing significant upside.
The business presents optionality and proven execution to capture share in enormous and fast growing addressable markets in Latin America.
The business trades at expensive valuation multiples, but the opportunity and runway for growth ahead of them remains incredibly large.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
Both of Mercado Libre's groupings of businesses (Commerce and Fintech) benefit from two-sided network effects.
On the commerce side, buyers and sellers meet in Mercado Libre's marketplaces to buy and sell goods. As the number of buyers and sellers increase, both parties have more compelling reasons to continue to shop and sell where they have a large market and variety of stuff.
On the fintech front, these effects would be similar. Mercado Pago benefits from its user base growing. As the platform is adopted by buyers and merchants, more new merchants and buyers will be attracted to using the platform. Additionally, existing users will experience a growing value proposition as the platform network expands.
We can see the value of the network showing up as high and increasing take rates, particularly in the Commerce business.
The Comprehensive Latin American Platform
Mercado Libre knows exactly what its target market needs, and it has created an integrated ecosystem of marketplaces and products to meet those needs.
Other e-commerce giants outside Latin America are faced with one major issue - about 50% of people in the region don't have a bank account or a credit card.
The population is severely underbanked and left out of the e-commerce equation without a digital payments solution. This is where Mercado Pago and Mercado Credito come into play. With these financial services, Latin Americans all throughout the region suddenly have the ability to buy and sell goods and services digitally on Mercado Libre, other online stores, and in-store with mPOS.
The integration of Mercado's financial services products with its other platforms, especially e-commerce, makes the ecosystem extremely sticky and it is highly unlikely residents will look to more difficult-to-use e-commerce platforms like Amazon or other local players over Mercado Libre.
Mercado Libre simply understands the needs of its Latin American customers better than anyone and provides well-integrated solutions that make the entire ecosystem highly attractive to merchants and consumers. It also has such vast operations within the region, competitors would have to spend obscene amounts of money and convince millions of users in a highly functional and comprehensive commerce and fintech platform to switch. Switching costs, therefore, are high.
Going Above and Beyond for Users
The company's competitors, like PagSeguro, a payment company, or FLEXE, a logistics company, run their businesses in more of a siloed fashion in specific countries. On the other hand, Mercado Libre reaches customers all across Central and South America.
Consumers are more inclined to use Mercado Libre's products over competitors because of their familiarity with the brand and the company's vast reach.
Besides its fintech solutions, Mercado Libre's innovations like Mercado Envios has helped the company build a moat around its competitive position in recent years. Starting a shipping & logistics service for Mercado Libre Marketplace sellers essentially monopolized the e-commerce market in Mercado Libre's favour.
Instead of relying on external services to distribute goods, merchants using Mercado Libre can store and ship products using its in-house service. This has proven very beneficial as nearly 80% of products on Marketplace are shipped through Envios. Envios is efficient and effective, which together can be said to provide immense value to sellers.
Since the cost to open warehouses and other logistics infrastructure require high upfront investments, competitors face massive financial disincentives to try competing, and merchants are likely to rely on a third party - in this case, those operated by Mercado Libre - to provide the shipping and warehousing capacity.
Mercado Libre controls everything in the production line, from the platform and marketplace, to the final shipping services to complete orders. Merchants have it all with Mercado Libre, and consumers reap the ultimate rewards with a reliable and consistent e-commerce experience.
Latin America is severely underbanked. Due to the remarkably low amount of bank accounts held by Latin Americans, this new service allowed consumers, regardless of their banking status, to access the platform. Mercado Libre's fintech solutions are incredibly important to the region.
Latin American merchants and consumers are adopting e-commerce at high rates. Latin America will see a surge in the number of small- and medium-sized businesses going online, resulting in the entire e-commerce market growing at a 30% compounded annual growth rate ("CAGR") from the end of 2021 through 2025. Mercado Libre undoubtedly has the most robust region-wide e-commerce network with an integrated fintech platform that could be used on and off the ecosystem.
Spread Too Thin?
Mercado Libre is a dominant force when it comes to the e-commerce world, but its diverse business model may be too much to handle.
Every one of its services has its own set of competitors. Mercado Pago is up against the forces of PayPal and PagSeguro, Marketplace is up against OLX and Amazon. Mercado Envios is up against FLEXE.
Despite being the Latin American leaders in these industries, can Mercado Libre continually protect its moat in each area? As the company continues to expand its business, it may not direct enough attention to specific services, leaving a blind spot open for competitors of which they can take advantage.
Investors should also be aware of the geographical climate of Latin America when evaluating the future growth of the company. Countries like Argentina have unstable currencies along with rising (hyper)inflation rates.
As a stock priced in USD, weakness in local currencies and / or strength in the USD would act as a headwind for the stock price and the region as a whole. Similarly, Mercado Libre is not valued cheaply - volatility in currencies and a worsening geopolitical climate could "de-rate" Mercado's stock by souring investor sentiment and devaluing earnings when looking at the USD-converted value.
As an example, Brazil is Mercado Libre's largest market. The Brazilian Real has devalued about 50% against the US dollar over the past five years. The Mexican Peso also has also experienced a multi-year decline against the US dollar. We cannot speculate on which direction Latin American currencies will go, but there is certainly a risk that they could go lower.
Mercado Libre has been accumulating debt, albeit not to levels that are concerning to us yet. At about 3.0x net debt to EBITDA, we think Mercado Libre's strong growth profile and EBITDA should be enough to service this debt.
However, we are confused by Mercado Libre's recent decision to issue over $1.5 billion of common stock for "general corporate purposes", which we do not believe will be value-creating expenditures. Not only has this diluted current shareholders, but the choice of issuing equity instead of debt raises the cost of capital. When the cost of capital rises, a company's valuation is generally adversely affected.
While a one-time raise may not be a cause for concern, this could point to further equity offerings being made in the future. We are keeping a close eye on Mercado Libre's financing decisions.