Latin America is one of the world’s largest emerging markets, and it is growing rapidly. Major U.S. companies are rushing to get established in countries like Brazil and Argentina in an effort to capture market share ahead of potential competitors. However, it seems they are already too late. Latin American innovators and entrepreneurs have already designed solutions for the digital age that are customized for the unique needs of Latin American consumers.
Some of the biggest names in Latin America include:
- dLocal — enables digital payments across borders so Latin American consumers can connect with global merchants
- iFood — what started as a food delivery service now features the world’s largest bank for restaurants
- Kavak — an all-in-one solution for finding, financing, and accepting delivery of used cars
- Nubank (Nu Holdings) — a full line of fintech services for the Latin American market, including digital banking, lending, investing, and crypto
- Nuvocargo — a comprehensive digital logistics platform that facilitates the movement of goods between Mexico and the United States
Each of these organizations is growing quickly, and all are being closely monitored by investors from around the world. For example, Warren Buffett has been a strong proponent of Nubank. His holding company, Berkshire Hathaway, put money into Nu before it went public.
While all of these Latin American companies are generating investor buzz, there is a name that rises to the top of every list: MercadoLibre — South America’s answer to eBay, Amazon, and PayPal. That has investors curious. What does MercadoLibre do? Why is the Latin American market growing so quickly, and how is that growth benefiting MercadoLibre? What are the risks of MercadoLibre stock — and, of course, is MercadoLibre stock a buy?
MercadoLibre: Slow Start To Fast Sprint
In the United States, e-commerce has taken a big chunk of the retail market share away from brick-and-mortar businesses over the past 10 years. The pandemic boosted online sales, as consumers who weren’t entirely comfortable with virtual shopping pre-COVID rethought their positions.
Compared to the U.S. and other developed countries, Latin America has been way behind in its transition to digital sales. This is due in part to the fact that, until recently, most consumers didn’t have access to the internet and didn’t own devices capable of connecting to online stores. However, MercadoLibre didn’t wait for consumers to be equipped with smartphones and Wi-Fi. It prepared in advance to welcome Latin Americans the moment they got online.
MercadoLibre’s founders saw the potential for online sales just after Amazon went public. They launched the Argentina-based company in 1999 when dot coms were booming. MercadoLibre grew fairly slowly at first. When it held its IPO on August 17, 2007, MecadoLibre’s market cap was estimated at less than $750 million. Its net revenue for 2006 was just $52.1 million, and net income was $577,205 — or one cent per share. Today, MercadoLibre’s market cap is over $50 billion.
How Does MercadoLibre Make Money?
MercadoLibre is Latin America’s largest e-commerce platform, and it currently operates in 18 of the 20 Latin American countries. Though it started small, it now offers a variety of e-commerce solutions, including a marketplace that connects merchants and buyers, digital payment services, financing and credit products, shipping and logistics, and online advertising.
MercadoLibre: The Marketplace
When MercadoLibre was introduced, it was only a marketplace. This division of the company is its oldest and best-known. Essentially, individual users, merchants, and businesses list products for sale in a manner similar to eBay. Items can be sold for a fixed price, or sellers can choose an auction format.
Over the course of 2021, more than 1 billion products were sold through MercadoLibre’s marketplace, and MercadoLibre generated revenue from fees and commissions on each of those sales. In some cases, MercadoLibre charges a final value fee for items sold through the marketplace — typically a percentage of the total sale price, which varies by region and/or item category. For example, in Brazil, the final value fee is 16.5 percent of the sale price.
In some geographies, MercadoLibre ensures it is able to generate revenue even when items are relatively low value. For example, in certain markets, there is a per-unit fee assessed for every transaction that falls below a specified threshold. This is often in addition to the final value fee.
Mercado Pago: Fintech Solutions
Mercado Pago was developed to support marketplace transactions. It gave users the option of making digital payments for their purchases, which was faster and more convenient than the alternatives.
As digital payments increased in popularity, Mercado Pago expanded its product line to include digital financial services unrelated to marketplace transactions. For example, users can now make digital payments for online purchases outside of MercadoLibre’s ecosystem, and there are new credit lines and loan options to meet the needs of consumers.
Today, Mercado Pago’s fintech app, Mercado Credito, has 117 million users. In 2021, the division issued more than $1.25 billion in loans. Mercado Pago launched a credit card for the Brazilian market, and it plans to expand that product to other Latin American countries in the coming quarters.
Mercado Pago plays a critical role in delivering MercadoLibre’s overall revenue. Among other revenue streams, it generates funds through commissions charged on payments processed outside of the marketplace platform. Depending on the geography, commissions can range from 11 percent to 30 percent.
Other sources of revenue include commissions on installment loan payments, cash withdrawal fees, cash advance fees, and merchant services equipment — not to mention interest on credit products, which ranges between 15 percent and 35 percent in most cases.
Mercado Shops: SAAS Stores and ERP
Merchants who wish to operate their own online shops don’t have to build them from the ground up. Like Shopify, Mercado Shops gives sellers the opportunity to create digital storefronts from which to sell their products. Better still, the shops are integrated into the larger MercadoLibre ecosystem, which means extensive exposure for a minimal subscription fee.
Subscriptions vary in cost based on the user’s desired features, and there are basic, no-frills options that cost nothing at all. Mercado Shops generates revenue from subscriptions, final value fees, and, in some cases, transaction fees on low-value items.
Mercado Envios: Logistics Solutions
One of the biggest obstacles for online merchants is getting products to the buyers. MercadoLibre decided to remove that obstacle for its clients through the introduction of Mercado Envios — a shipping and logistics service. Sellers who leverage the Mercado Envios platform get rapid shipping at prices below market.
In some cases, they get deep discounts for shipping — or the fees are waived altogether.
Mercado Ads: Online Advertising
Google, Facebook, and Amazon make a fortune through online advertising, so it is no wonder that MercadoLibre decided to add digital advertising to its family of products and services.
The service works in a manner similar to that of its U.S.-based peers. Businesses display ads on web pages of interest to their target audience, and they have the ability to measure the effectiveness of their marketing campaigns through a package of data collection and analytics tools. As of late 2021, Mercado Ads had an average of 52,000 advertising clients each month.
Under this umbrella, Mercado offers classified ads that allow individuals and businesses to increase exposure within the MercadoLibre platform. In most cases, the company generates revenue from its Classified service on a per-click basis, which ties together the interests of the advertiser and the company.
As MercadoLibre expands its ecosystem, it enhances the customer experience. That encourages deeper relationships, increases customer retention, and attracts new users to the platform. During the third quarter 2021 earnings call, Chief Financial Officer Pedro Arnt noted that this strategy is deliberate. He said:
“By stitching together our credit products with our payment and commerce services, our ecosystem is becoming increasingly more robust. We are seeing greater depth in our relationships with merchants and users that begin to engage with several touch points throughout our ecosystem.”
MercadoLibre Growth Is Astonishing
MercadoLibre reported its fourth-quarter 2021 financial results on February 22, 2022, along with business achievements that demonstrated the company’s continued focus on growth. For example, by the end of Q4 2021, MercadoLibre had a total of 82.2 unique active users, and gross merchandise volume (GMV) hit $8 billion. That’s an increase of 21.2 percent year-over-year (USD) or 32.2 percent if the impact of foreign currency exchange is neutralized (FX-neutral). Of the $8 billion in gross merchandise volume, 75.5 percent went through mobile channels.
Mercado Envios services grew in popularity, with shipments totaling 275.9 million items in the fourth quarter. That’s a 29 percent increase over the same period in 2020. Furthermore, in the fourth quarter, managed network penetration reached 89.5 percent.
Growth in the Mercado Pago division was just as impressive. Unique active users reached 34.5 million, and total payment volume (TPV) increased 52.1 percent to a total of $24.2 billion. On an FX-neutral basis, that’s an increase of 72.8 percent. The total number of payments/transactions went up by 56.1 percent year-over-year in the fourth quarter for a total of more than 1 billion.
Meanwhile, consumers embraced the option of using Mercado Pago’s digital payment solutions outside of MercadoLibre’s ecosystem. Total payment volume outside the platform increased by 75.1 percent year-over-year (USD) and 96.5 percent on an FX-neutral basis. Altogether, customers made $16.1 billion in payments.
The asset management service, Mercado Fondo, is up to $1.2 billion in assets under management (AUM), and it boasts 22.3 million Latin American users at the close of fourth-quarter 2021. Mercado Credito has more than tripled in size year-over-year, with its portfolio nearing the $1.7 billion mark.
Q4 2021 financial highlights include the following:
- $2.1 billion net revenue (60.5 percent increase year-over-year in USD or 73.9 percent increase FX-neutral)
- $1,357.8 million in commerce revenue (55.6 percent year-over-year growth in USD)
- $773.0 million in fintech revenue (70.1 percent year-over-year growth in USD)
- $853.2 million gross profit
- 40 percent gross profit margin (as compared to fourth-quarter 2020’s 36.8 percent)
- $829.8 million in total operating expenses (61.4 percent increase year-over-year in USD)
- $23.3 million in income from operations (an improvement over fourth-quarter 2020’s loss of $25.1 million)
- $53.4 million in interest income and other financial gains (135.7 percent increase year-over-year in USD)
- $53.7 million in interest expense and other financial losses (69.8 percent increase year-over-year in USD)
- $56.9 million in foreign currency losses
- $33.9 million net loss before income tax expense (22.9 percent improvement of fourth-quarter 2020’s $44.0 million net loss)
- $46.1 million total net loss ($0.92 net loss per share)
In short, Arnt summed up the quarter — and the year — this way:
“The final outcome was a year with record results across the board, sustained strong growth in key business metrics and topline, and improving margins and operating income for a second consecutive year.”
Why Is the Latin American Market Growing?
The key to MercadoLibre’s impressive growth in recent years is Latin Americans’ increased access to the digital world. This trend, which was already well-established by 2019, took a sharp upturn as a result of the pandemic. In fact, the Latin American e-commerce market grew 37 percent in 2021, making it the fastest-growing region in the world. What’s more, that rate of growth is expected to continue for several years. Some analysts project that e-commerce will continue to increase by approximately 35 percent each year through 2025.
While most Latin American countries had already considered connecting communities to the internet a priority before the pandemic, the rapid spread of COVID and the resulting need to limit travel and exposure pushed governments to pour resources into connectivity. The ability to learn, work, and access healthcare and other services from home was no longer a luxury — it was critical to survival.
In 2020, 72 percent of Latin Americans had smartphones. By the end of 2021, more than 500 million Latin Americans — 74 percent — had them, and that figure is expected to increase by another 100 million in the next three years. If accurate, more than 81 percent of Latin Americans will have access to smartphones by 2025.
In terms of mobile internet, just 358 million — 57 percent — of Latin Americans had access in 2020. That’s projected to reach 423 million or 64 percent of the population by 2025.
Access to smartphones and mobile internet means the ability to use mobile payment services. Since a large percent of Latin Americans don’t use banking services at all — roughly 70 percent — there is a massive opportunity for all sorts of fintech solutions.
MercadoLibre is leading the way as far as encouraging the adoption of digital payments — a convenience that is proving immensely popular in a market that is accustomed to cash-only transactions.
MercadoLibre: What Could Go Wrong?
As mentioned, Latin America is made up of 20 distinct countries, each of which has its own government and its own regulations. That adds a layer of complexity for any country aiming to grow in the Latin American market. A one-size-fits-all approach simply isn’t possible.
However, there are some risks facing MercadoLibre regardless of where its customers make their homes. Those interested in buying MercadoLibre stock must pay close attention to these potential issues:
Increased interest rates and volatility in currency have been challenging for many Latin American countries, including Argentina, Brazil, and Mexico. Those markets are particularly important from MercadoLibre’s perspective because they generate more than 94 percent of the company’s consolidated sales. As inflation puts upward pressure on prices, consumers make fewer purchases. That has a direct impact on the number of transactions moving through MercadoLibre’s various businesses.
The same changes in economic conditions coupled with interest rate increases put any company that extends credit in a risky position. If customers default on their obligations, MercadoLibre and its businesses could face complications in terms of paying their own debts. Considering MercadoLibre has a stated goal of growing its credit portfolio, that is a real and present risk for MercadoLibre shareholders.
Finally, though MercadoLibre is a leading brand and already controls a significant portion of the market, competitors are multiplying and gaining strength. Other Latin American fintech and commerce platforms have developed unique features that MercadoLibre has not yet matched, and there is always the risk that well-established U.S. companies will attempt to chip away at MercadoLibre’s market share.
Is MercadoLibre Stock a Buy?
Despite these risks, MercadoLibre’s position in the market and its impressive growth in recent years have most analysts rating MercadoLibre stock a buy.
Though the company won’t be able to sustain the astonishing rate of growth it experienced in recent years, some projections suggest net income will increase from 2021’s $83 million to a total of $5 billion by 2026.
That doesn’t do much for short-term investors, but those who buy MercadoLibre stock now and hold it for five or more years are likely to realize significant returns.