Don’t Buy MercadoLibre for Its E-Commerce Business, Buy It for This Instead

Table of Contents 1. Banking infrastructure is lacking in Latin America2. Its payment ecosystem is…

E-commerce giant MercadoLibre (NASDAQ:MELI) has spent two decades steadily building its e-commerce marketplace and logistics network to become the leading retailer in Latin America. The stock has rewarded investors with a 2,500% gain over the past decade.

The company’s growth runway remains intact for its e-commerce business, but it’s no longer the only star of the show. Its fintech business could be what drives returns on the stock in the future; here are two reasons.

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1. Banking infrastructure is lacking in Latin America

The financial infrastructure in Latin America is underdeveloped compared to more mature markets like the United States. While roughly 95% of U.S. households have banking services, countries throughout Latin America still lack banking access.

Banking penetration rates are under 90% throughout the region, led by Brazil at 88%, but countries like Argentina, Columbia, and Mexico lag far behind. MercadoLibre’s Mercado Pago is a digital wallet that lets its users send and receive payments over the internet, as well as offering banking functions like its virtual checking account and credit services.

It gives consumers a nice tie-in to the e-commerce platform, making payments an easy complement to the business. The lack of a mature banking network in the region means less competition for digital banking options like Mercado Pago.

2. Its payment ecosystem is rapidly growing

In its second quarter this year, Mercado Pago’s total payment volume –the “traffic” going through its platform — grew 47% year over year on-platform, meaning payments contained within MercadoLibre (such as paying for an e-commerce item). And 94% off-platform, which are payments made outside of the company’s goods and services.

The company’s total of unique active users, which counts all MercadoLibre services and is not unique to Mercado Pago, was 98 million through the first six months of 2021. This was a 50% increase over the same period last year.

Fintech revenue has grown over the years, as shown by these annual totals:

Year Revenue
2018 $601 million
2019 $950 million
2020 $1.4 billion

Fintech revenue is $1 billion through the first six months of 2021, an 81% increase over 2020, and a notable acceleration in growth.

MercadoLibre is laying more financial services across this user base, including insurance, investment products, and credit services such as buy now, pay later. MercadoLibre remains a commerce-centric business, deriving about two-thirds of total revenue from its commerce segments. But the fintech business carries higher margins because selling goods is very price-competitive and requires more capital investments.

As Mercado Pago grows and offers more services, its customer acquisition costs could fall further, making the fintech business the segment that steers MercadoLibre’s bottom line. Management reports the financials as a combined entity, so investors will want to follow how earnings grow as the business increases its top line. Analysts are looking for positive earnings per share of $2.47 from MercadoLibre this year versus a loss per share of $0.08 in 2020, indicating that the business is reaching that tipping point where revenue continues to grow faster than expenses, accelerating earnings growth.

The stock is underestimated

MercadoLibre has benefited from the pandemic, which pushed consumers to adopt e-commerce and digital payments more quickly. Investors have soured on “COVID stocks” (i.e. stocks driven by the pandemic) for much of this year, which could explain MercadoLibre’s fall from its highs. Assuming the company hits analyst revenue estimates of $6.8 billion for the 2021 fiscal year, the stock’s resulting price-to-sales ratio of just under 11 is right on par with where it was heading into the pandemic. However, the company’s growth has accelerated since then.

Revenue grew 60% from 2018 to 2019, but the pandemic lifted revenue growth to 73% in 2020. Growth has remained strong, and MercadoLibre’s revenue increase this year would hit 72% at the $6.8 billion estimated figure. Put another way, the business is larger and growing faster than before COVID, but the valuation has remained the same. The company has strong operating momentum, and the emergence of digital banking in Latin America could mean that MercadoLibre’s growth is far from over.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


https://www.fool.com/investing/2021/10/15/dont-buy-mercadolibre-for-its-e-com-business-buy-i/