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MercadoLibre: Bullish on the Amazon of Latin America
Stock Analysis & Ideas

MercadoLibre: Bullish on the Amazon of Latin America

MercadoLibre (MELI) operates the largest e-commerce ecosystem in Latin America in terms of unique visitors and page views.

The company has a vibrant presence in 18 countries, including Brazil, Argentina, Mexico, Chile, and Peru, facilitating commerce through its marketplace platform, allowing users to buy and sell in most of Latin America. MercadoLibre’s other services comprise fintech solutions, advertising, e-store setup, and loan financing.

Due to its parallel operations and continuously-expanding e-commerce model, MercadoLibre is often referred to as the Amazon (AMZN) of Latin America.

While shares have constantly seen new highs amid the company’s expanding financials, the stock has lost around 38% of its value over the past year. In my view, following the stock’s recent correction, MercadoLibre’s investment case has become rather attractive. For this reason, I’m upgrading my stance on the stock from neutral to bullish.

Improving Financials

MercadoLibre’s Q3-2021 results illustrated solid growth in the company’s financials, with gross merchandise value growing 29.7% in local currency to $7.3 billion. Items sold surpassed 259 million on the platform, producing $1.9 billion in net revenue during the quarter, a 72.9% increase year-over-year on an FX-neutral basis. MercadoLibre’s growth, hence, remains quite strong, despite last years’ boosted results by the pandemic.

As far as its fintech business goes, Total Payments Volume (TPV) advanced 59% year-over-year to $20.9 billion, while credit originations reached $1.1 billion, compared to $284 million in the comparable period last year.

Mercadolibre’s growth metrics are rather impressive, especially in the company’s payment solution segments, suggesting robust prospects going forward.

What I like about the company’s payment solutions is that while it is quite close to what PayPal (PYPL) does, it is not necessarily confined within MercadoLibre’s ecosystem alone. In fact, in Q3, around 64% ($13.4 billion out of $20.9 billion) of TPV materialized outside of MercadoLibre’s e-commerce platform.

With MercadoLibre’s fintech ecosystem expanding over time, the company should be able to achieve synergies with customers’ investment accounts, allowing for multiple more growth avenues. The company now counts over 20 million customers in its asset management product.

What makes MercadoLibre’s potential in the field quite extraordinary is that much of Latin America’s population remains unbanked. Approximately 10% of the adult population in Brazil does not have a bank account.

In Argentina, things are worse, with less than 50% of all adults having a bank account. Consequently, there is an exceptionally big untapped market for Mercadoliebre to take advantage of. Hence, I expect to be seeing constantly strong numbers in the company’s upcoming earnings.

Wall Street’s Take

Turning to Wall Street, MercadoLibre has a Strong Buy consensus rating, based on seven Buys and one Hold assigned in the past three months. At $1,893.75, the average MercadoLibre price target implies 67.2% upside potential.

Conclusion & Risks

In my view, MercadoLibre is a smart buy, currently trading at around 8 times this year’s sales, which is an inexpensive multiple considering the company’s underlying growth.

That said, there are some risks not to be disregarded. The first is concerning foreign exchange rates. MercadoLibre’s reported revenues are subject to various Latin American currencies, which are often very volatile. Further but U.S.-based investors face another conversion to USD to get the company’s final numbers.

Additionally, Latin America, in general, features heightened business environment risks compared to the rest of the world due to its still emerging status relative to its stronger global peers.

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