Mercado Libre is a Latin American company based out of Argentina, incorporated in US NASDAQ as Meli founded by Marcos Galperin in 1999. Mercado Libre became the first Argentine company to reach “Nasdaq 100 Index” list. Mercado Libre meaning “Free Market” in Latin is the largest online commerce ecosystem in Latin America. Company purpose as they state is to purpose is to democratize commerce and money in order to contribute to the development of the LATAM regions. Their platform is designed to provide users with a complete portfolio of services to facilitate commercial transactions. They are a market leader in e-commerce in each of Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela, based on number of unique visitors and page views. Mercado also operates online commerce platforms in the Dominican Republic, Honduras, Nicaragua, Salvador, Panama, Bolivia, Guatemala, Paraguay and Portugal. Their platform provides buyers and sellers with an environment that fosters the development of a large e-commerce community in Latin America, a region with a population of over 635 million people and one of the fastest-growing Internet penetration rates in the world. Mercado has 6000 employees working globally. Mercado Libre offers their users an ecosystem of six integrated e-commerce services: the MercadoLibre Marketplace, the MercadoLibre Classifieds Service, the MercadoPago payments solution, the MercadoLibre advertising program, the MercadoShops online webstores solution and the MercadoEnvios shipping service on the Mercado platforms. Business is on the same technological platform in each of the operating countries but each country has its own white-labelled standalone website and custom searches. Management focus is to serve people in Latin America by providing Ecommerce marketplaces, payment settlement services to facilitate such transactions, and advertising solutions to promote the entrepreneurs, making capital more accessible through different credit products.
Marcos Galperin founded Marcado Libre 20 years back and surviving multiple recessions at the same time keeping up with steady 50% plus growth demonstrates the management capabilities. I have created various discussion videos where Marcos exudes his leadership and management capabilities. Check the video out to understand more:
Strategic Analysis of Mercado Libre business segments:
Marketing and Product Development:
In 2017, Mercado`s marketing and advertising expenses were $175 Million. Their primary marketing deployments are online search engines, social media email plus onsite marketing and offline marketing. 2 pronged approach of attracting new users and generating more frequent trades by existing users.
Mercado spends significant money on research and development almost 10% of the revenue. They incurred product expenses of $127 Million in 2017 primarily driven by enterprise payments architecture, APIs and Marketplace software’s to integrate and scale to meet the growing user volume demand.
User Base, Views and Volumes:
Has confirmed registered user volume of 212 Million in the platform, which had increased by 21.7% in 2017 over 2016 user base. Marketplace Gross Merchandise Volume (GMV) in 2017 was $11.7 Bn up by 46% from 2016.
MercadoPago achieved 230 Million Payment transactions in 2017.
Growth Strategy, Competitive Positioning, Capital Allocations:
Company is investing the capital on growth avenues especially in to technology ecosystems like trend analytics, marketing softwares and loyalty avenues. Company is not paying dividend as of first quarter of 2018.
Mercado Libre had 100 Million download of their Mobile app in 2017. 6 out of 10 users login through their Mobile App and 46% of sales coming from mobile devices which indicates higher growth with higher penetration of mobile and internet in LATAM counties.
In addition they are having a wide network of sellers and are closely engaged with sellers in their platform by offering instant credit or loans based on the underwriting data, free courses, webinars, user experience improvements analysis and free market trends which fuels sales of their sellers businesses. Value proposition is high and active for sellers and buyers leveraged by Analytics and Loyalty technology offerings.
Currency fluctuations and Inflationary environments in Brazil, Argentina. Devaluations of certain local currencies in Latin America versus the U.S. dollar, the effects of Venezuelan deconsolidation and high interest rates in those countries, could cause a decline in year-over-year net revenues, particularly as measured in U.S. dollars.
Cost of Capital being around 14-18% is way too high and so returns has to be higher than that to create value.
Political and economic conditions in Brazil, Venezuela may have an adverse impact on operations.
Competition from Amazon or other International players like Rakuten (in Brazil) entering LATAM Ecommerce space. Competition in payments space with iZettle/Paypal, Google checkout, PayU, Conecta (Mexico).
Revenues, Operating Metrics & Valuations:
2017 year end revenues were $1.4 Bn approx growing by 65% over 2016 revenues. Primary revenue drivers are marketplace and non-marketplace streams. Gross Merchandise Volumes increased by 46% & MercadoPago total Payment volume increased by 77% in 2017 over 2016.
|Segments ($Mn)||FY16||FY17||Growth %|| % share of |
|Cost of revenue||(307.5)||(678.5)|
|Product & Tech Development||(98.5)||(127.2)|
|Sales & Marketing||(156.3)||(325.4)|
|General & Admin||(87.3)||(122.2)|
|Impairment of long lived assets||(13.7)||(2.8)|
|Loss on deconsolidation of Venezuelan subsidiaries||–||(85.8)|
|Total Operating expenses||(355.8)||(663.3)|
|Income from Operations||181.1||56.3|
|Other Income (expenses)|
|Interest income & other fin gains||35.4||45.9|
|Interest expense & Other fin charges||(25.6)||(26.5)|
|Forex gains (losses)||(5.6)||(21.6)|
|Net Income before tax||185.3||54.1|
*** Effective December 1, 2017, the Company determined that deteriorating conditions in Venezuela had led the Company to no longer meet the accounting criteria for control over its Venezuelan subsidiaries. The recent Venezuela’s selective default determination, the restrictive exchange controls in Venezuela, the lack of access to U.S. dollars through official currency exchange mechanisms resulted in other-than-temporary lack of exchangeability between the Venezuela bolivar and the U.S. dollar, and restricted the Company’s operating decision, the Company’s ability to pay dividends and satisfy other obligations denominated in U.S. dollars. Therefore, in accordance to the applicable accounting standards, as of December 1, 2017, the Company deconsolidated the financial statements of its subsidiaries in Venezuela and began reporting the results under the cost method of accounting.
Gross profit margins were 51.5%, 63.6% and 67.0% for the years ended December 31, 2017, 2016 and 2015, respectively. The decrease in their gross profit margins resulted primarily from:
(i) Increased costs from providing free shipping, mainly in Brazil and Mexico, which totaled $181.6 million for the year ended December 31, 2017.
(ii) Higher penetration of their payment and shipping services into Argentina, Brazilian and Mexican marketplaces.
(iii) Increased customer support costs of $20.6 million from 2016 to 2017.
(iv) Higher hosting costs of $14.3 million for the year ended December 31, 2017.
|%||2016 %||2017 %|
|Product & Tech Development||11.7||9.1|
|Sales & Marketing||18.5||23.3|
|General & Admin||10.3||8.7|
|Impairment of long lived assets||1.6||.2|
|Loss on deconsolidation of Venezuelan subsidiaries||0||6.1|
|Total Operating expenses||42.1%||47.4%|
|Income from Operations||21.4%||4%|
We cannot really value Mercado Libre just on the basis of earnings alone considering they are still investing heavily for expansion into newer areas of growth like Payments, Digital Financial credits and payments and even to new geographies in Latin America. But still we will try to value the firm within the known constraints.
Sustainable Earnings power could be $200 Million for a smoothed out margins of 10% considering 2019 year as baseline. Capex from 2018 Cash Flow statement was $83.6 Million.
Expensed Growth Capex: Product development & brand development which accounts to almost $200 Million.
Growth component of product development plus brand development cost: 80% of $200 Million which is $160 Million. So there is additional sustainable earnings of $160 Million.
Will capitalize back 80% of product & development 2019 cost, which means adding $160 Million dollars and that makes sustainable Operating earnings to $360 Million. Considering the cost of capital being high in these countries, we can take average discounting at 14-15%. At that rate, earnings power value would fetch an Enterprise value of $2-2.5Bn. Equity value of enterprise will be $2.2 Bn – $312 Mn + $388 Mn = $2 Bn.
Market Capitalization of Mercado Libre is $15 Bn which is 7 times Equity value based on sustainable earnings with no growth factored. It trades at 9 times FY19 sales and at a factor of 1.4 times Gross Merchandise value. Alibaba the leading Ecommerce and payments player in China trades at roughly 0.8 times 2018 GMV and 10 times FY18 sales.
Overall Mercado Libre could be a significant value at a 50% discount to the current Market value. This means Mercado is trading at 2 times the intrinsic value approximately. Mercado Libre as a stock has returned staggering 1000% in last 10 years.
But look at the opportunity size for this company to grow. Around 50% of Latam countries are cash economy with huge un-banked/underbanked population. Having reach-ability into the deep pockets of un-banked Latin American customers, having strong understanding of the regulatory intricacies are definitely a competitive advantage as well as opportunity for growth for Mercado Libre. Being incumbent and first mover, they are able to dominate the digital finance democratizing where the market size is significantly large. Mercado Credit which they launched in Brazil and Argentina literally ran short of plastic when they launched. That’s the level of demand in these cash-economies. Offering credit to Merchants on the platform is a chain reaction where they will be able to sell more inventories with more credit. Data analytics and trend insights helps them aid more business on their platforms both from Marketplace and Financial services. Being in the industry for 20 years now and see multiple bubbles burst in economic cycles, they have been there and done it all. In a nutshell, below are factors that will play the tailwind for Mercado Libre:
- Huge user base of 212 Million registered users.
- Strong Credit platform & payment products that did $13Bn total payments volume in 2017 transactions.
- Deep penetration across South American continent with strong footing in around 14 countries.
- High growth opportunity in LATAM due to rapidly proliferating internet and mobile technologies.
We cannot factor in returns on invested capital or earnings growth at this stage considering the variability in expenses relating to growth in new avenues like Payments, New geographical markets & Technology development. But a consoling factor is consistent 40% + sales growth over last 3 years. At the same time, it should be noted that the cost of capital is around 15% which is too high and this would mean Mercado Libre has to find a sweet spot to return above 15% on invested capital along with the growth momentum if it has to create value. This might eventually be a good potential acquisition candidate as well for players like Amazon, Walmart or even Alibaba. They were once evaluated by Ebay for acquisition in 2006 which didn’t materialize.
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