Making Money Through Borrowed Ideas
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I like to do my research before I buy something. When I’m looking to buy something online I usually check Amazon.com (NASDAQ: AMZN) for a reference price and reviews, and compare that to the results I get on eBay (NASDAQ: EBAY). Sometimes I’ll even check Craigslist to see if it’s available locally, and maybe even have a chance to test it out in person.
In Latin America, internet users can get all of the best features of those sites in one – MercadoLibre (NASDAQ: MELI). MercadoLibre hosts a market place for merchants to sell their products through fixed-price or auction-based formats, it acts as an online payment processor, like PayPal, and it allows users to post classified ads for real estate and services. Additionally, it offers pay-per-click advertising on its website, much like Google.
The eBay of Latin America
When eBay tried to enter the Latin American market a few years ago, it ran head first into MercadoLibre and fell flat. Instead of trying to beat the company, eBay chose to join it and bought an 18% stake in MercadoLibre. Now, the ‘Estados Unidos’ link on MercadoLibre.com redirects users to eBay.com.
The business model of the two is essentially the same. MercadoLibre and eBay both match up merchants with consumers. Unlike Amazon, the companies keep no inventories, which keep margins high. MercadoLibre has posted net profit margins above 25% each of the last two fiscal years and earned 26.1% net profit margin over the last twelve months. eBay has similarly high margins.
MercadoLibre also established MercadPago, the Latin American analog of PayPal. Use of MercadoPago is now used for more than 95% of MercadoLibre purchases, and is growing in the triple digits for online transactions outside of MercadoLibre.
A Growth Play
MercadoLibre is definitely a growth play. Internet penetration in Latin America is currently only 40%, which means there’s a lot of room for the company to grow as the middle class comes online and starts shopping. E-commerce is booming in the region, and should continue to grow. Online sales in Mexico are expected to triple from 2010 levels by 2016. Estimates show Chile spends more per capita online than the United States. These are both countries where MercadoLibre is the dominant online retailer.
The company has over 70 million registered users, adding 4 million last quarter for 25% year over year growth. Its websites get over 30 million unique visitors on a monthly basis. By comparison, Amazon receives about one-third of those numbers in Latin America.
The companies dominant presence in the growing Latin American market has led to spectacular growth from top to bottom. Revenue has grown 29.7% on average over the last three years, and at a greater than 40% clip over the last five years. Year-to-date, revenue is up 27%, but that number is deflated due to headwinds from foreign exchange.
EPS has grown 29% over the last four quarters; however, that included three earnings misses. Perhaps growth is slowing for MercadoLibre, or perhaps headwinds from foreign exchange rates caused the earnings misses, but it’s hard to keep up the breakneck pace at which earnings grew over the last five years as the company starts to mature. Still, I believe it’s reasonable to expect the company to continue growing earnings above 25% based on the growth in internet access and commerce in Latin America.
In terms of valuation, MercadoLibre is certainly priced for future growth. Trading at a forward P/E of 33 it is significantly more expensive than eBay, which is priced at 21.8 times forward earnings. However, analysts expect growth of greater than 28% over the next five years for MercadoLibre, resulting in a PEG of 1.2. Even using a more conservative estimate of 25%, the PEG is 1.3 compared to eBay’s 1.5.
Comparing MercadoLibre to Amazon on P/E basis isn’t appropriate, because Amazon currently eschews profits for growth. However, on a price-to-sales basis, a good metric for retailers, Amazon leads the group with a ratio of just 1.9. By comparison, MercadoLibre and eBay have P/S ratios of 9.1 and 4.9 respectively. However, this number represents a discount from MercadoLibre’s historical multiple of 11.9.
With the stock price having fallen nearly 25% since its mid-October high, I believe now is a good time for long-term growth investors to buy MercadoLibre.
adamlevy owns shares of Amazon.com. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!
