This Disruptive Company is Firing on All Cylinders
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Mercado Libre (NASDAQ: MELI) were jumping by an almost 23% on Friday after the company reported a blowout quarter. In an economic environment of lackluster consumer spending and strong currency headwinds for the company, Mercado Libre demonstrated that it is a disruptive business with superior growth prospects. The e-commerce leader in Latin America still has plenty of growth to offer.
Even after their last run up, at less than $82, shares of MercadoLibre are still trading well below their yearly highs in the $104.5 zone. The company is trading at a P/E ratio of almost 44, so it’s going to have to deliver some outstanding growth to justify that valuation. Fortunately for investors, Mercado Libre can deliver that - and even more - in the following years.
Mercado Libre is usually referred to as “the eBay (NASDAQ: EBAY) of Latin America”, since eBay owns 18% of Mercado Libre and the two business models are quite similar. There is an important difference though; Mercado Libre doesn´t face such stringent competition from Amazon (NASDAQ: AMZN), so it has an undisputed leadership position in online commerce in the Latin American region.
Mercado Libre is not a retailer; it simply matches buyers and sellers of all kinds – individuals and companies – and makes a commission on sales. This means higher profit margins for the company versus retailers like Amazon, since Mercado Libre doesn´t have to sell low priced items itself in order to compete efficiently; it only needs to provide an efficient e-commerce platform.
The company also owns a payment platform called Mercado Pago, which plays a similar role to the one PayPal plays for Ebay. Apart from being a trustworthy payment method for purchases via Mercado Libre, Mercado Pago is being expanded to other commercial operations outside the platform and becoming a payment system business on itself.
From the latest earnings press conference:
Our Payments business performed very well throughout the quarter, not just marketplace processing, which I have just outlined. MercadoPago’s stand alone revenue sources, financing and off-platform payments grew at an even faster pace than the marketplace, classifieds and advertising revenues during the quarter.
The table compares financial figures for Mercado Libre versus eBay and Amazon, and it shows that the company is well above its American peers in terms of growth and profitability. Mercado Libre has higher profitability than eBay and has delivered better growth than Amazon, which has privileged high growth at the expense of margins. These kinds of numbers are only possible when a company has an almost monopolistic position in a high growth market.
And there is no slowdown at sight, the company reported a 35.6% increase in items sold during the last quarter, and the numbers were very strong across the board. Revenues for the last quarter increased by a 47% annually, and net income grew at a 91% versus the same quarter in previous year when measured in local currency.
Mercado Libre is strongly benefitting from three different growth factors in the middle term; rising internet penetration and familiarity with e-commerce in Latin America, growing middle class income in the region, and the company´s top of mind presence in its industry.
The biggest risk for Mercado Libre investors comes from the possibility of Amazon or eBay entering Latin America and changing the competitive landscape for the company. Being a partner in the company, eBay doesn´t look like a very threatening competitor, but Amazon is a whole different story.
There are strong rumors about Amazon planning to enter Latin America in 2014, hardly a surprise when one considers Amazon's tremendous expansionary ambitions. The online retail giant is well known for its aggressive competitive tactics, and could certainly impose some serious competition for Mercado Libre.
But Mercado Libre has the first mover advantage in Latin America, and Amazon won´t have it very easy in the region. Cross border tariffs and regulation make international selling much more complicated, and this means that Latin America is composed of different national markets instead of one whole unit like the US.
Amazon can also expect some considerable political opposition in Latin America if local retailers see their business threatened. The online retailer has affected, or even destroyed, many smaller competitors in the US, and that provides some strong lobbying arguments for Latin American retailers trying to avoid harsh competition from Amazon. In fact, maybe a purchase of Mercado Libre by one of its US counterparts sounds like a better idea than trying to fight the local leader.
Mercado Libre may not be the cheapest stock around, but it’s certainly a very special one. It has a rock solid competitive advantage in the very promising business of online commerce in Latin America, and management is executing for growth even under complicated economic conditions. This disruptive company looks well positioned for superior growth over the long term.
acardenal owns shares of Mercado Libre. The Motley Fool owns shares of Amazon.com and MercadoLibre. Motley Fool newsletter services recommend Amazon.com, eBay, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.