E-commerce sales soared 63% in Latin America in 2020, reaching a whopping $100 billion, according to eMarketer. The global pandemic has accelerated the adoption of e-commerce as well as fintech payment solutions.
However, e-commerce penetration is also still low in South America at just 4.9% compared to 13% in the U.S. This means companies in this sector have plenty of growth runway ahead.
The Amazon of Latin America
MercadoLibre (MELI, Financial) is the e-commerce market leader in the South America region and has been dubbed "The Amazon of Latin America." The company is the market leader in three main markets: Brazil, where they have 27% market share, Argentina with a 68% market share and Mexico with 13.6%. The region's largest e-commerce market is Brazil, which makes up approximately one third (32.5%) of all e-commerce volume in Latin America. This is a region where MercadoLibre is dominant.
According to Web Retailer, MercadoLibre is the "Clear Leader" in Latin America with 667 million website visits per month, compared to just 169 million by Amazon (AMZN, Financial).
The firm's fintech and digital payments segment Mercado Pago is one of the most lucrative parts of the business. According to BIS, limited access to retail payment services and their high costs are significant challenges in Latin America and the Caribbean. Thus, Mercado Pago has plenty of tailwinds behind it. Total payment volume (TPV) grew 43.9% to $20.9 billion over the past year. Mercado Pago also the first fintech company to provide crypto access to a base of millions of users in Brazil, many of which are unbanked.
Similar to Amazon in the U.S., MercadoLibre has invested heavily to expand its logistics network. MercadoLibre controls about 89.5% of its logistical network, which enables the company the better control delivery times and costs. This is a competitive advantage in my eyes.
High growth numbers
According to its most recent earnings report, the company grew its revenues a meteoric 77% in 2021 to $7 billion, while profits soared up 244% to $441 million. MercadoLibre previously made a high gross margin of 75% and an operating margin of around 25%. However, in the past few years these margins have declined, mainly due to investments into logistics, discounts and advertising. This is an "Invest for the future" strategy, which is risky but could very well pay off in the future by growing the user base at a faster clip.
Undervalued growth opportunituy
Plugging the latest financials into my valuation model, which uses a discounted cash flow method of valuation, I have predicted what I believe is a fairly conservative 40% growth rate for next year (since the company grew 77% last year) and 35% for the next two to five years.
With these numbers, I get a fair value estimate of $1,600 per share. The stock is currently tradng at $1,140 and thus is undervalued. The legendary investor Peter Lynch coined the term G.A.R.P (growth at a reasonable price), and I believe this stock seems to fits that criteria.
The GF Value line, a unique intrinsic value calculation from GuruFocus which uses the stock's historical multiples, such as the price-earnings ratio, the price-sales ratio, the price-book ratio and the price-to-free cash flow ratio, in combination with historical returns and analysts' estimates of future business performance, gives the stock a rating of signficantly undervalued.
Final thoughts
MercadoLibre does face a lot of risks, including competition from the likes of Sea Limited (SE, Financial) and other e-commerce giants, the volatility of the Latin American market and of course inflation, which is keeping many growth stocks surpressed right now. Having said that, the company is still the market leader in the largest e-commerce markets in Latin America and is poised to benefit from many industry tailwinds, such as increasing e-commerce penetration and increasing digital payment adoption.
