MercadoLibre: An Undervalued Overachiever (NASDAQ:MELI)

Introduction

If somebody requested me to clarify why I believed MercadoLibre (NASDAQ:MELI) was a terrific firm in only one sentence, I’d say “it’s the Amazon of Latin America.” Then after they ask how the Amazon River was in a position to generate internet revenue and money circulate, I’d inform them I’ve already used up my one sentence and want them good luck.

However utilizing two sentences (or extra), I’d go into depth concerning the range of MercadoLibre’s enterprise mannequin, how sticky it’s to current prospects (which in flip attracts new prospects) and naturally its development charges and profitability. The No. 1 e-commerce participant in Latin America has completed nothing however execute at a excessive stage over the previous decade and in my view, will solely proceed to take action going ahead. Additionally, the cherry on prime is that it’s an effective way to diversify a portfolio outdoors of the USA. I’ve taken a deep dive into this enterprise mannequin and estimated the intrinsic worth of the inventory to be $1,980.70. Let’s get into it.

What’s MercadoLibre’s alternative?

For starters, MercadoLibre isn’t a carbon copy of Amazon – but it surely’s a straightforward start line to conceptualize what they do and the way they make cash. There are six elements to their enterprise mannequin, with 5 of them having comparable similarities to what Amazon supplies: MercadoLibre MarketPlace vs Amazon’s e-commerce platform, Mercado Pago vs Amazon Pay, Mercado Envios logistics vs Amazon Prime/Logistics, Mercado Adverts vs Amazon adverts and Mercado Outlets vs Amazon Shops. The one outlier is Mercado Libre Classifieds service, which doesn’t have an Amazon counterpart that’s related sufficient to match.

Beginning with the MercadoLibre MarketPlace alternative, it’s estimated that MercadoLibre at the moment controls round 21.6% of the Latin American e-commerce market. The three main gamers within the Latin American e-commerce market are Brazil, Mexico, and (arguably) Argentina – and these three international locations make up 95.4% of MercadoLibre’s income. Now, the true fantastic thing about the Latin American market is that it’s nonetheless in its improvement stage and going through fast development prospects forward. Brazil is anticipated to develop from $36.6 billion e-commerce gross sales in 2022 to $77.2 billion by 2027, representing a 111% development. Mexico can be anticipating fast development with a projection from $34.2 billion e-commerce gross sales from 2022 to $68.2 billion by 2027, which is a 99% enhance. Argentina is the smallest e-commerce market dimension of the three, because it’s at the moment estimated at round $7 billion in 2022. Nevertheless, the expansion fee isn’t any much less fast, as that is projected to develop 111% by 2027 to achieve 109% by 2027.

As per the beneath screenshot from MercadoLibre’s Q3 investor presentation, they’re exhibiting that they’re consolidating extraordinarily nicely in these three markets. Each Gross Merchandise Quantity (GMV) and the quantity of things bought are growing quickly on a q/q foundation. The quantity of distinctive patrons has additionally elevated 18% y/y, exhibiting that they’re attracting new prospects at a quick tempo.

That is implausible to see as e-commerce is a really aggressive business, so it’s clear that MercadoLibre is making all the suitable strikes to develop its buyer base in such an surroundings. Buyer retention, nevertheless, is one other matter fully, which is the place MercadoLibre really shines with its sticky enterprise mannequin.

The primary ingredient of that is Mercado Pago, which is MercadoLibre’s digital funds platform, however deeply built-in throughout the MercadoLibre ecosystem. Sticking with the comparability theme, it’s fairly much like PayPal (PYPL) (which I beforehand wrote an article on right here), however particular to MercadoLibre and the Latin American market. Clearly, this can be a draw back because it means that it’ll have difficulties being adopted outdoors of Latin America – however its weak point can be its energy. Individuals who wish to purchase gadgets on MercadoLibre MarketPlace will resolve to make use of Mercado Pago. Then again, individuals who wish to use Mercado Pago will purchase issues on MercadoLibre MarketPlace. Each of those act in flip to draw and retain prospects, and subsequently enhance income and revenue. Nevertheless don’t simply take my phrase for it, see the beneath screenshot from MercadoLibre’s Q3 investor presentation. Whole Fee Quantity (TPV) in my view is an important metric used to measure the success of a digital cost platform and has been quickly growing every quarter. In Q3 of 2022, this was measured at $32.2 billion and has now grown to $47.3 billion in Q3 of 2023 – a rise of 46.9% y/y. This could proceed to extend because the Latin American market continues to develop. One other fascinating level is the quantity of distinctive customers which are on the fintech platform rose to 48.4 million in Q3. Contemplating that Latin America at the moment has round 300 million on-line purchasers, Mercado Pago accounts for round 16% of the market, which isn’t unhealthy in any respect.

The second a part of their sticky enterprise platform is Mercado Envios logistics. As soon as a buyer buys a product by way of Mercado Libre MarketPlace and pays with it by way of Mercado Pago, they may then have it delivered to them via MercadoLibre’s logistics community. This community can be extraordinarily aggressive throughout the Latin American Market. As of Q3, Mercado Libre accounts for 48% of all shipments throughout its jurisdiction. Additionally, its complete managed community penetration reached a document stage of 94.2%, which is nice to see them retaining every thing in-house and sustaining a stage of management.

There may be additionally a terrific alternative with MercadoLibre adverts and Mercado Outlets. Whereas I don’t count on both of those two to take over the world anytime quickly, they undoubtedly could have a spot throughout the Latin American Market. Contemplating the present inhabitants of Latin America is 650 million (almost double the inhabitants of the USA), there must be an honest slice of income they will seize. Nevertheless, it’s laborious to measure how a lot this will likely be contemplating Amazon, Meta and Google virtually dominate the promoting business worldwide. Mercado Outlets then again I count on to carry out nicely, because it integrates nicely inside their enterprise mannequin. Clients will purchase gadgets via Mercado Pago from shops arrange on Mercado Outlets and have them delivered by way of Mercado Envois logistics.

Total, MercadoLibre has a robust ecosystem that may entice and retain prospects and in flip will likely be troublesome to disrupt. It’s because as soon as a shopper has been uncovered to the system, it is going to be very troublesome for an additional firm to persuade them the grass is greener elsewhere, which reveals up within the spectacular double-digit development charges.

What about MercadoLibre’s administration workforce?

MercadoLibre’s administration workforce has confirmed they’re able to executing their enterprise mannequin. There was a latest shakeup with Martín de los Santos taking up as the brand new CFO from Pedro Arnt in August 2023. There may be each good and unhealthy information with this transformation. The excellent news is that Martín has been with MercadoLibre since 2007 as a board member, which reveals loyalty. The unhealthy information is that MercadoLibre has been executing extraordinarily nicely, so seeing a possible change in how they carry out isn’t precisely superb. I imagine Martín will do nicely, nevertheless, we’ll must double-check his efficiency in each the upcoming quarter and Q1 of 2024.

In any other case, Marcos Galperin (the CEO) has completed a beautiful job constructing this firm up from scratch and working it at present, so hopefully he’ll keep round for so long as he can.

What about MercadoLibre’s monetary place?

MercadoLibre’s financials are in an excellent place. For the total 12 months 2022, they printed over $2.49 billion in FCF and $9.54 in EPS. These numbers have already been overwhelmed within the first 3 quarters of 2023, as they’ve to date reported $2.88 billion in FCF and a whopping $16.29 in EPS. Whereas no steerage has been offered for This autumn, I’d count on this to be a document quarter for MercadoLibre resulting from their confirmed development technique and all the principle consuming holidays being situated on this quarter (together with Black Friday and Cyber Monday).

Relating to their stability sheet, MercadoLibre at the moment has $5.49 billion in money and money equivalents and $2.14 billion in long-term debt. This implies in the event that they wished to, they might repay all their debt comparatively rapidly and nonetheless have money to burn. Please see my beneath abstract of MercadoLibre’s key metrics:

At first look, this inventory seems extraordinarily overvalued, however seems may be deceiving. MercadoLibre usually trades with a trailing P/E within the 40 to 90 vary. Given the present TTM P/E of 80 we’re undoubtedly in direction of the higher finish of the vary, nevertheless have in mind the expansion fee this firm is experiencing – which is demonstrated by the exceptionally low PEG ratio of 0.43

MercadoLibre additionally usually trades with a trailing EV/EBITDA of 30 to 90 – so at the moment TTM EV/EBITDA of 31.12 we look like buying and selling low cost – not in absolute phrases not less than, however in relative phrases. The business median trailing P/E and EV/EBITDA ratios are roughly 14.5 and 11.1 respectively, which MercadoLibre is clearly buying and selling above. Total, these are clearly blended outcomes.

Relating to the stability sheet ratios, almost all of those are good with some being fairly glorious which are extremely uncommon to see. A TTM RoE of 36% is unquestionably prime tier and there’s a robust FCF yield. The present and fast ratios above 1.0 additionally point out there’s a low monetary danger to the corporate. The P/B ratio is extraordinarily excessive at 28.96, nevertheless, the one laborious property they actually have are their warehousing/storage models – and their PP&E marks up roughly 7% of their complete property for reference. Total, MercadoLibre has positioned itself ready of energy.

What’s MercadoLibre’s intrinsic worth?

As per my final article, I’ve additionally determined to undertake 3 totally different approaches to find out the truthful worth per share of MercadoLibre’s inventory. I’ve additionally put collectively the beneath monetary projections based mostly on the place I imagine MercadoLibre is headed:

Historic financials and projections

As talked about earlier, no official steerage has been offered. I do imagine nevertheless that MercadoLibre will proceed to develop income quickly based mostly not solely on their confirmed previous efficiency but additionally as a result of quickly rising Latin American markets, the penetration they’ve developed inside these markets, and naturally, the standard companies they supply to their prospects. Nevertheless, to be on the protected aspect, I’ve quickly decreased their y/y development percentages to achieve 11% by 2028.

I’d additionally count on margin growth to proceed at a continuing fee, as MercadoLibre expands and cost-cutting measures come into play – boosted by the standard advantages of getting an built-in ecosystem working together with an financial system of scale.

Web revenue evaluation

I’ve determined {that a} present truthful P/E for MercadoLibre is round 60. Whereas that is undoubtedly fairly excessive, I imagine that their robust monetary place and development charges demand this premium. Compared, Amazon is at the moment buying and selling with a ahead P/E of round 55, which is near the 60 I selected. Keep in mind, with the expansion charges they need to be placing up, this time subsequent 12 months their present 67 P/E will drop to round 45.

Assuming they hit my projected internet revenue of $1.66 billion in 2024, the truthful value of MercadoLibre at the moment must be round $1,974.77 – giving us a 25.78% upside from the present value.

As well as, this 60 P/E implies that the share value will attain $4,764.10 if my projections are appropriate – which suggests a 203.45% return.

EV/EBITDA evaluation

I’ve determined that MercadoLibre ought to have a base case EV/EBITDA of 25. Once more, that is comparatively excessive, however for a similar causes as above, I believe that this premium is deserved. As well as, that is really decrease than their present projected ahead EV/EBITDA of round 28.5, which suggests this isn’t out of the working.

Utilizing this, the truthful worth for MercadoLibre must be round $2,111.73 per share based mostly on the EBITDA they need to be printing for 2024. I’ve additionally offered calculations for EV/EBITDA ratios larger/decrease than 25 if you happen to’d like this adjusted.

DCF evaluation

Please see the beneath DCF evaluation, the place I calculated the terminal worth utilizing the typical of the EV/EBITDA exit a number of technique and WACC technique:

I imagine an acceptable perpetual development fee for MercadoLibre is 3.5%. This isn’t solely as a result of quickly rising industries this firm operates in but additionally that they’re particular to the Latin American market that’s anticipated to undergo a fast improvement cycle. I believe 3.5% is greater than truthful.

Their value of debt was estimated utilizing their newest 10-Q and I used an efficient tax fee of 35% based mostly on what they’ve traditionally paid. For the risk-free fee, I’ve selected utilizing the 10-year US treasury fee, which was 3.91% on the time of writing.

MercadoLibre’s present beta is 1.6 and I used a market return of 8.41%, which I calculated based mostly on the present estimated market ERP (round 4.5%)

I’ve run the calculations and located a fair proportion value of roughly $1,855.62. Similar to in my earlier article, I’ve offered the beneath sensitivity evaluation, if you happen to assume I’ve been too aggressive/conservative.

Common share value

Taking the averages from these 3 strategies, I’ve discovered an intrinsic worth for MercadoLibre’s share value of $1,980.70, which is a 26.16% upside from the present share value.

What are the dangers to MercadoLibre?

Like every firm, there are in fact dangers to MercadoLibre’s enterprise mannequin which can have an effect on my projections

Firstly, as I hinted at earlier, competitors is extremely robust in each the e-commerce and fintech area. MercadoLibre goes to be competing of their market in opposition to the likes of Alibaba, Sea Restricted and naturally, Amazon. MercadoLibre is at the moment holding its personal and has grown market share since 2020, nevertheless in the event that they drop the ball or firms like Alibaba and Amazon resolve to shovel their hundreds of thousands of {dollars} into attacking the Latin American market – it may spell huge hassle for MercadoLibre.

Secondly, there’s financial danger normally. In fact, MercadoLibre has proven they will nonetheless carry out nicely even in a troublesome financial surroundings, because the South American financial system has been doing poorly since 2020, so I imagine this danger is low general. Nevertheless, inflation has additionally been a scorching matter not too long ago and Argentina has been hit closely – reporting inflation charges of over 100%. Whereas that is clearly unhealthy for Argentina’s financial system, MercadoLibre does get a optimistic aspect from this. Mercado Pago turned a technique to combat in opposition to inflation by buying and selling the Argentine Peso for safer property and defending their prospects’ internet value. In flip, this elevated the adoption fee of Mercado Pago.

Thirdly, political/regulatory dangers. Counties outdoors of the West aren’t usually identified for working free and truthful democracies – and South America isn’t any exception. If a few of the international locations MercadoLibre operates in begin to turn into extra aggressive on the political stage, or they begin to unfairly push via laws – then there could also be downstream (or even perhaps purposeful) results on MercadoLibre’s efficiency.

Conclusion

Primarily based on the evaluation I’ve carried out, I imagine MercadoLibre is at the moment undervalued and subsequently a purchase. The corporate has a powerful historical past of confirmed outperformance in addition to a promising future with practical development and revenue ventures forward.

I believe the one actual dangers to MercadoLibre are competitors and the overall financial surroundings they function in. Competitors clever, they’ll want to make sure they maintain tabs on what the likes of the large boys are doing, resembling Alibaba and Amazon. Someday, not less than one in every of them will seemingly resolve to open the floodgates and strike laborious on the Latin American market – a day that MercadoLibre must be anticipating and ready for. Relating to the financial danger, they’ve confirmed they will execute in poor financial environments after exhibiting their efficiency post-2020. Nevertheless, a weaker financial system normally isn’t superb for e-commerce or fintech firms. That is very true if occasions happen in Latin America that trigger an general slowdown in how they develop their financial system/infrastructure, resembling a change in management that pushes political instability or regulatory frameworks.

All in all, the factor that I like most about MercadoLibre is that it’s a implausible maintain for the long run. We now have numerous examples of how traders profit from shopping for implausible firms whereas they’re nonetheless of their development section and are actually reaping the rewards 10 years later. After I take into consideration the place MercadoLibre will likely be in in the event that they proceed executing for the subsequent 10 years, then it will simply turn into one other instance of individuals wishing that they had purchased in.