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MercadoLibre: A Good Pick

February 28, 2014 | About:

MercadoLibre (NASDAQ:MELI) announced yesterday fourth quarter and 2013 financial results, registering net revenues of US$472.6 million for the past year, an increase of 26.5% in comparison to 2012, and a net income of US$117.5 million (up 16% in comparison to last year). According to the report released by the company, Brazil is its largest market, among the 13 other Latin American countries where it operates, followed by Argentina.

Being the largest e-commerce ecosystem in Latin America, MercadoLibre seems to be consolidating this position with an increase of 22% of registered users and of 23% of items sold in 2013. The online platform functions as a marketplace with payments, advertising and e-building solutions.

The figures announced yesterday highlight a P/E ratio of 35.42 (at the time, the share price was at US$94.23), signaling the expectations that growth would continue in the coming future. The mentioned ratio is above eBay (NASDAQ:EBAY)'s $26.90.

Comparing full-year 2013's results to those of 2012, EPS grew 15.65% (from US$2.30 to US$2.66; eBay's EPS is US$2.18).

Brazil is MercadoLibre's largest market by far, with 43.7% of total revenues, followed by Argentina (25.8%), Mexico (7%) and Venezuela (5.6%).

Today, at midday the stock was trading at US$112, an 18% increase from yesterday close.

The Strategy

The company continues taking advantage of the growing Internet penetration in Latin America. The potential for e-commerce is high in the region with less than 3% of retail transactions done online and just 10% of the population shopping through the web. In addition to that, MercadoLibre is investing heavily to provide new and better services to its customers and to expand its customer base.

MercadoLibre not only provides a marketplace, but it is adding new services such as the promotion of payments and shipping solutions through MercadoPago and MercadoEnvios, respectively. With the introduction of MercadoPagos the company provides both a payment system in the platform, with financing options and a buyer protection program, and a stand-alone business similar to PayPal. Then, MercadoEnvios becomes the connection of online and offline services and, a year after being launched, it is growing significantly in Brazil and in Argentina, the two countries in which the service is functioning.

In October 2013, MercadoLibre signed an alliance with ChannelAdvisor (ECOM) in order to help retailers and consumer goods manufacturers better sell through the platform. The goal of the agreement on MercadoLibre´s side is to become more attractive for larger companies by supplying services such as comparison shopping engines, search engine ads and handling of post-sale customer services, among others.

The Risks

The recent turmoil that occurred in both Argentina and Venezuela is expected to negatively influence economic activity at least in the short term. Moreover, the currencies of these two countries are being affected by the instability and uncertainty of economic policies, producing a depreciation that will be reflected in the consolidated results of MercadoLibre considering that around 30% of net revenues came from these countries last year.

Similarly, eBay is expected to start operating in Brazil shortly. The American company owns around 18% of MercadoLibre´s stock and both companies had signed a non-compete agreement that expired in 2006; lately, eBay has been active in Latin America as the acquisition of the classified company alaMaula in 2011 demonstrated.

Rating: 1.7/5 (3 votes)


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