MercadoLibre: New Avenues With Ads And Hope With Argentina

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MercadoLibre is a dominant player in the e-commerce market in LatAm. Additionally, it has competitive advantages that are difficult to replicate, such as its logistics.Among its highly representative ...

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Additionally, it has competitive advantages that are difficult to replicate, such as its logistics.Among its highly representative ...</p>\n\n<a href=\"https://seekingalpha.com/article/4683087-mercadolibre-new-avenues-with-ads-hope-with-argentina\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0251143458.SGD","symbol_name":"Fidelity Emerging Markets A-SGD","start_time":0,"source_url":"https://seekingalpha.com/article/4683087-mercadolibre-new-avenues-with-ads-hope-with-argentina","article_id":"2426491200","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1350291038/image_1350291038.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2426491200","pubTimestamp":1712755792,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"MercadoLibre is a dominant player in the e-commerce market in LatAm. 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Additionally, it has competitive advantages that are difficult to replicate, such as its logistics.Among its highly representative peers, the company has the highest margins, the highest ROE, and excellent prospects for new businesses, such as advertising revenue.Finally, MercadoLibre trades at the lowest PEG in the last two years, which could be a good investment opportunity.Leila Melhado Investment Thesis I recommend buying MercadoLibre shares (NASDAQ:MELI), which are trading below their PEG over the last two years. Additionally, the company has strong competitive advantages and has found an excellent new avenue for growth via ads revenues. Finally, the crisis in Argentina and the consequent devaluation of the Argentine peso for MELI's EBIT has always been relevant, therefore, the possibility of an appreciation of the Argentine currency under the management of a more austere Government would be very positive for the company. Introduction Known as the Amazon of LatAm America, MercadoLibre is in the TOP 5 in market cap among E-commerce companies in the world. The company is the leader in E-commerce in Latin America, its markets have an average GDP of $5 trillion, and a combined population of 500 million people. LatAm Market Leader (IR Company) MercadoLibre currently has operations in 18 countries, with emphasis on Brazil, and has a team of more than 35,000 employees around the world. Let's learn a little more about the company's history and how its business model allowed the company to obtain strong competitive advantages, which are the pillars of my bullish thesis for the shares. History and Business Model MercadoLibre was founded in 1999 as a marketplace platform in Argentina. At the time, the company operated in a similar way to the E-bay group in the United States (USA), but MercadoLibre changed over time. In the early 2000s, Mercado Pago was launched, with a focus on safe purchasing, trying to fill an opportunity gap due to the fact that consumers were still very afraid of making online purchases at that time, marking its entry into the technology sector as a fintech. The company began operating in Brazil in 2002, the market that would become its largest buyer today. As a way to protect consumers and reduce distrust, Mercado Pago implemented innovative solutions at the time, with the amount paid to sellers being retained by MercadoLibre until the customer confirmed that they had received the product and that it met the purchase specifications. Under the ticker MELI, in August 2007 MercadoLibre became the first company in the Latin American technology and e-commerce retail sector to go public on the New York Stock Exchange. Let's see the timeline below, before talking about your business model: MELI's History (IR Company) In the company's business model, there is a division between \"yellow world\" and \"blue world\". Its number of customers is more than 150 million, even in its institutional presentation the company makes the comparison as if it were a country: MercadoLibre Size (LatinoMetrics) The \"yellow world\" is made up of the e-commerce and complementary business units. The business units that complement the marketplace operation are Ads, which consists of displaying ads paid for by sellers; Mercado Envios (Shipping Fees), related to all of our own delivery logistics; and Mercado Shops, which is close to \"E-commerce As a Service\", structuring the entire marketplace system for a third party and charging a fee. The \"blue world\" includes the financial services business unit, which is Mercado Pago. Fintech has a digital bank value proposition, offering all the products that a digital bank offers, including granting credit. In November 2020, MercadoLibre received authorization from the Central Bank of Brazil (Bacen) to operate as a financial institution in the country. Below, we have a diagram of how this ecosystem works: MELI's Ecosystem (IR Company) With this robustness, MercadoLibre has a market share of approximately 27% in Brazil, 68% in Argentina and 14% in Mexico. But how did the company reach this scale? MercadoLibre adopted a reverse path in building the marketplace in relation to the competition: it all started with 3P in 1999, when few platforms in the world operated in this modality, and expanded to 1P sales only in recent movements. This enabled the company to have the competitive advantages listed below: (i) Take rate premium in relation to other marketplaces (Shopee, from Sea Group, charges a take rate of 14%): Take Rate (IR Company) Another reason for the award is revenue from Ads, which we will talk about later. (ii) More than 3.2 million sellers who use only the company's platform. As a reference, Shopee reached 3 million sellers in Brazil, but they also use other platforms. (iii) MercadoLibre's greatest competitive advantage comes from its logistics. In Brazil, many deliveries are already made on the same day. MercadoLibre continues to invest heavily in logistics and, while many retail giants laid off employees at the beginning of 2023, MercadoLibre continued hiring and expanding its operations. All this strength corroborates my bullish thesis for the shares. Below, we will carry out a financial analysis of the company with Amazon and Shopee's controller, Sea Group, so that we can better understand the company's new perspectives and growth avenues. MELI's Fundamentals In the following, I will use Seeking Alpha and Koyfin to compare MercadoLibre with its peers in the world, like Amazon (AMZN) and Sea Limited (SE)   Ticker (MELI) (AMZN) (SE)   Country Argentina USA Singapore   Revenue Growth 3 Years [CAGR] 53% 14% 43%   EBITDA Margin 18.6% 14.6% 6%   Net Income $1B $30B $148M   Net Income Margin 6.8% 5.2% 1.1%   ROE 40% 17% 2.6%   Net Cash Position $4.3B $85B $3.9B   Click to enlarge Here it is necessary to emphasize that businesses have some similarities, but there are several differences. As an example, we have Amazon and its cloud operation, and Sea Limited with its gaming operation. However, we can have an idea of the quality that MercadoLibre has. Although Amazon profits 30x more than MELI, MercadoLibre has a CAGR OF 53% in its revenues in the last 3 years. Furthermore, the company has a higher Ebitda margin, higher net income margin and higher ROE. But is the company trading at a premium compared to its competitors due to these great numbers? Valuation Is No Bargain, But There Is Opportunity To evaluate companies with strong growth, I like to use Price Earning Growth, as it is an indicator that considers profit growth. Let's look at the results obtained with Koyfin: PEG (Koyfin) We have little visibility, what we can conclude is that Amazon has a premium for MercadoLibre, however Sea Limited still does not generate a permanent profit for us to use PEG. Therefore, we will use MercadoLibre's PEG history: MELI's PEG (Koyfin) Due to the lack of comparable peers and a complex business, using the company's historical PEG seems like a more efficient form of analysis. We conclude that MercadoLibre trades at the lowest PEG in the last 2 years, and given the excellent numbers we saw in the financial analysis, I recommend buying MercadoLibre shares. Now let's see what Seeking Alpha's Quant and Factor Grades tool says about the company's valuation Factor Grades and Quant Rating According to the Seeking Alpha quant tool, MELI has excellent scores in growth, profitability, momentum, and revisions: Quant Rating & Factor Grades (Seeking Alpha) However, the company has an F rating for valuation, and this means the Quant Rating indicates holding the shares. Nonetheless, in my opinion, there are two major triggers to unlock even more value for the company, as we will see below. A New Avenue Of Growth - Ads The company calls itself the largest e-commerce company in Latin America, and data proves this. According to the SemRush website, in January 2024 MercadoLibre had 320 million monthly visits to its website in Brazil, followed by Amazon (AMZN) with 289 million, in 3rd place there is a Brazilian player with 154 million visits, and in 4th and 5th place the giants Shopee (SE) and AliExpress (BABA) with 106 million and 104 million visits respectively. Most Visited Retail Websites in Brazil, January 2024 (SemRush) As we can see in the timeline, Mercado Ads was created in 2009, but the business has been gaining great attention from the company and showing excellent results in recent years: Mercado Ads Revenue (IR Company) Revenues from Mercado Ads already represent almost 5% of MercadoLibre's total revenues. And although the company does not provide further projections for the numbers, for reference, according to Bloomberg in 1Q23, Amazon had advertising revenue of $9.5b, an annual expansion of 23% and a representation of 8% in total revenues. In this sense, MercadoLibre should have revenue of more than $1 billion, in the short term, just with advertisements. However, with such a large audience among Brazilians, the company can exceed 10% revenue contribution from Ads: Mercado Ads Revenue ($mn) (The Author) The second trigger could come from a better economic environment for operations in Argentina, which represents almost 1/4 of the company's revenue. Can Argentina Contribute To MercadoLibre? About 100 years ago, Argentina was the richest country in the world, a time when its meat exports were successful. However, after long years of Peronism, Argentina found itself in a severe crisis and the devaluation of its currency, the argentine peso: ARS/USD (Investing) However, Argentina elected Javier Milei as its president, a pro-free market liberal who will have a big job ahead of him. The new president has an extensive agenda of cutting spending and even dollarizing the economy. His first days in government are promising, the IMF itself said it was impressed with Milei in his first days in government. Another graph that corroborates this improvement is Argentine bonds reaching historic rates: Argentina's Restructured USD Bond Prices (Reuters) But after all, what does this change for MercadoLibre? Revenues from Argentina correspond to 23% of the company's total revenues, and the constant exchange rate devaluation has a relevant impact on the operation's EBIT. We can see the impact on the effective tax rate per country, as we can see in the Annual Report - 2023 page 76: Effective Tax Rate By Country (IR Company) Basically, the increase in the effective tax rate is due to higher taxable foreign exchange gains, which are considered for local tax purposes, but are not recorded in accounting. This is because, under U.S. GAAP, the functional currency of Argentine operations is the US dollar, due to the country's highly inflationary status. It is difficult to project what the improvement in results will be, given that other Argentine presidents have not been successful in their economic agendas. And despite the difficulties, the company has been achieving excellent results, as we will see below: Latest Earning Results MercadoLibre released 4Q23 numbers impacted by non-recurring effects associated with tax liabilities, mainly related to previous periods (negatively impacting operating profit by $351 million and net profit by $218 million). Excluding these impacts, the results were good. GMV grew 40% y/y to $13.4 billion (+79% y/y on a currency neutral basis), while TPV increased 57% y/y. Adjusted gross margin fell to 60bps y/y, mainly impacted by investments in the logistics network (with new service centers in Brazil and Mexico) which the company expects to be gradually diluted in the coming quarters. Operational Results (IR Company) Adjusted net profit was $384 million (vs. $144 million in 4Q22). Profit was helped by the dilution of financial expenses through revenue growth of 42% y/y, partially offset by higher foreign exchange losses due to the revaluation of assets and liabilities in Argentina. However, so many strong results can leave investors biased, so let's explain the main risks to the thesis. Potential Threats To The Bullish Thesis The main risk in my view lies in the Argentine market. It is possible that Javier Milei will not be successful in his government and Argentina will once again be dealing with economic depression. The high level of interest reduces the penetration power of installment purchases in Argentina, hindering the growth of the receivables advance operation, for example. Another risk is intrinsic to Brazilian operations. Brazil is in an interest rate cut process, which began in August 2023 when the interest rate was 13.75%, and is currently at 10.75%. Historically, interest rate drop processes are beneficial for retailers, however, there was a reacceleration of Brazilian inflation in February (with some seasonality). This caused the Brazilian Central Bank to align its speech with more cautious interest rate reductions. The Brazilian Central Bank has been cutting interest rates by 50 bps per meeting, and there is an expectation that it will reduce interest rates by 0.25 bps to a floor (still uncertain) of 9% per year. Finally, we have operations in Mexico, which despite presenting opportunities for growth in financial services, the country's proximity to the USA brings consolidated financial intuitions and strong competitors for MercadoLibre in the fintech business. This is also reflected in e-commerce, due to Amazon's strong presence in Mexico, making it difficult for the Company to expand market share beyond 30%. The risks of investing in MercadoLibre shares are varied, and it is important that the investor is very careful when analyzing them. The Bottom Line The valuation shows that MercadoLibre is trading at the lowest PEG in the last two years. Furthermore, the company has the highest margins and ROE among its strong competitors. MercadoLibre's competitive advantages are relevant, and the company has excellent growth avenues to maintain its strong results in the coming years, such as the ads business.  Based on this analysis, I recommend purchasing MercadoLibre shares. Investors should pay attention to competitive advantages, such as their delivery logistics, and the prospects of their business. 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