Mercado Libre deep dive $MELI - the Brazilian eCommerce and fintech giant

Its dominance in Latin America makes it the Amazon of LatAM

Jan 13, 2024

Company background

MercadoLibre (MELI) is the leading e-commerce company in Latin America. MELI has built a strong competitive moat through network effects, scale advantages, and high switching costs for both buyers and sellers on its platform. MELI’s business model is asset-light, with most of its capital expenditure focused on technology and product development, allowing the company to generate strong free cash flow.

MELI has a long track record of beating consensus expectations. In Q4 2022, MELI reported 32% GMV growth and 76% TPV growth year over year, demonstrating the strength of its e-commerce and fintech businesses.

Going forward, we expect MELI to continue gaining market share in e-commerce and fintech in Latin America. MELI is poised to benefit from the shift to online shopping in the region, with e-commerce penetration in Brazil projected to reach 16.6% by 2024.

Mercadolibre’s results were driven by strong growth in its e-commerce business. The company's active marketplace sellers grew by 32% year-over-year, and its gross merchandise volume (GMV) grew by 39% year-over-year. MercadoLibre also saw strong growth in its fintech business. The company-owned Mercado Pago processed $20 billion in payments in the quarter, up 52% year-over-year.

The Marketplace segment includes revenue from the company's online marketplaces in Brazil, Mexico, Argentina, and Colombia. The Fintech segment includes revenue from Mercado Pago, the company's online payments platform. The MercadoLibre Advertising segment includes revenue from the company's advertising business. The Cybersource segment includes revenue from the company's payment processing business.

The Market, Industry, and Competitors

The company's total addressable market (TAM) is estimated to be $1 trillion. The company's TAM is expected to grow by 15% per year over the next five years driven by: a) The growth of the e-commerce market in Latin America. B) The increasing penetration of the internet in Latin America. c) The growing middle class in Latin America. and d) The increasing popularity of MercadoLibre's platform.

MercadoLibre's main competitors in Latin America include: Americanas S.A. (AMER3), Magazine Luiza (MGLU3), Carrefour Brasil (CRFB3) Walmart Brasil ($WMT), Shopify ($SHOP) is a Canadian e-commerce company that provides a platform for businesses to create and manage their online stores. MercadoLibre also faces competition from other online marketplaces, such as Shopee (from SEA limited $SE) Amazon ($AMZN), and eBay ($EBAY). However, MercadoLibre has a strong competitive advantage in Latin America due to its first-mover advantage, its deep understanding of the local market, and its strong brand recognition.

Unique differentiation

MercadoLibre has several unique differentiations that make it a leading e-commerce company in Latin America. These include:

First-mover advantage: MercadoLibre was founded in 1999, making it one of the first e-commerce companies in Latin America. This gives the company a significant head start over its competitors.
Deep understanding of the local market: MercadoLibre has a deep understanding of the local market in Latin America. This includes the local culture, the local economy, and the local preferences of consumers.
Strong brand recognition: MercadoLibre is a well-known brand in Latin America. This gives the company a significant advantage over its competitors, who are less well-known.
Comprehensive suite of products and services: MercadoLibre offers a comprehensive suite of products and services, including an online marketplace, a payment processing platform, and a logistics network. This gives the company a one-stop shop for businesses and consumers, which makes it more convenient and attractive than its competitors.
Strong financial performance: MercadoLibre has a strong financial performance. The company has been profitable for many years, and it has been growing rapidly. This gives the company the resources to invest in its business and to continue to grow in the future.

Management & Employees

The company's CEO, Marcos Galperin, has been with the company since its founding in 1999. He has a strong track record of success in growing the company and making it a leader in the e-commerce market in Latin America

CFO, Pedro Arnt, has over 20 years of experience in the financial industry. He has held senior financial positions at several companies, including MercadoLibre.

Stelleo Tolda is the Chief Operating Officer of MercadoLibre. He has been with the company since 2006.

Daniel Rabinovich is the Chief Technology Officer of MercadoLibre. He has been with the company since 2009.

Andre Chaves is the Senior Vice President of Strategy, Corporate Development, and Investor Relations. He has been with the company since 2013.

Andres Bernasconi is the Vice President of Product Development for Mercado Pago. He has been with the company since 2012.

Andres Patetta is the Vice President of Marketing Operations for MercadoLibre. He has been with the company since 2014.

Bull case:

•MELI is the dominant e-commerce and fintech company in Latin America with a strong competitive moat. MELI benefits from network effects, scale advantages, and high switching costs that reinforce its leadership position.

•MELI has a long track record of beating consensus expectations. MELI reported 32% GMV growth and 76% TPV growth in Q4 2022, demonstrating the strength of its e-commerce and fintech businesses. MELI’s adjusted EBIT margin expanded 500 basis points to 11.0% in Q3 2022, showing its ability to balance growth and profitability.

•MELI is poised to benefit from the shift to online shopping in Latin America. E-commerce penetration in Brazil is projected to reach 16.6% by 2024, providing a long runway for growth.

•MELI’s diversified business model and superior capital allocation allow it to outperform competitors. MELI stands out positively in capital allocation compared to peers like AMER and MGLU.

Bear case:

•MELI trades at a premium valuation (40x forward EBIT) that is at risk of compression if growth slows or profitability declines. MELI’s stock price has been closely correlated with US tech stocks, making it vulnerable to a broader sell-off in growth equities.

•Competition in e-commerce and fintech is intensifying in Latin America. Although MELI is the clear leader, competitors like Amazon, Sea Limited’s Shopee, and Rappi are making investments to gain a share. If these competitors are successful, it could pressure MELI’s growth and margins.

•Macroeconomic headwinds like high inflation, currency devaluation, and slowing consumer spending may weigh on MELI’s business. MELI generates most of its revenue in Brazil, Argentina, and Mexico, exposing it to country-specific risks.

•MELI’s credit product exposes it to higher credit losses if the economy weakens. MELI’s fintech business provides point-of-sale loans and credit cards to customers, which could lead to higher delinquencies and charge-offs during a downturn.