Friday, October 13, 2017

A Current AIM International Fund Holding: MercadoLibre Inc. (MELI) by Tim Milani "Still Room to Grow"

MercadoLibre Inc. (NASDAQ: MELI, $279.46): “Mantener MercadoLibre Acción”

By: Tim Milani, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


MercadoLibre Inc. (NASDAQ: MELI) is an e-commerce company in Latin America that provides its users with a variety of services across several platforms including the MercadoLibre marketplace, the Mercadolibre Classified Service and the MercadoPago payments solution.  The company is headquartered in Buenos Aires Argentina and was founded in 1999.

• MELI recently had another quarter of impressive gross merchandise volume (GMV) growth (up 36% on a reported basis, 56% on an FX neutral basis) and customer engagement growth with unique buyers and sellers up by 22.7% and 13.5%, respectively.

• Items sold during the quarter reached an all-time high of 61.5 million units representing an increase of 41.0% YoY. Mexico had the fastest regional growth YoY at 95.4%.

• Using data generated from MercadoPago and MercadoLibre's marketplace, the company announced the launch of MercadoCrédito, an online platform for lending and advancing cash to its merchants in Brazil and Argentina that will score their merchant base´s creditworthiness.

• MELI is a strong candidate for a potential takeover from a global e-commerce company such as Amazon or Alibaba due to its position as the leader of online commerce in Latin America which is posed to have a substantial increase in internet users over the coming years.

Key points: MELI is extremely well positioned in its industry and region as it is the leading provider of ecommerce services for Latin America where it has an impressive amount of users at 191 million total.  As there are 390 million Internet Users across Latin America MELI has a high penetration rate of ~49%.

The total number of internet users in the region is also projected to continue its growth by adding another 100 million by 2021 which MELI will undoubtedly benefit from.  This also presents several new opportunities for increasing monetization across multiple areas including mobile payments through their MercadoPago platform.

The company also has dedicated management that are committed to continuing their aggressive growth and delivering the highest value to end users.  Marcos Galperin, current CEO, chairman and co-founder of the company has successfully guided MELI through every stage of its life cycle thus far and with 10% share ownership he has sufficient reason to continue to align his interests with shareholders.

Finally the company is highly regarded both at home and internationally with Morningstar stating that it has the potential to be the next “Amazon or Alibaba” for it region.  They also project the user growth to continue at its previous 3 year rate of 20% through 2021.

What has the stock done lately?

MercadoLibre has had a substantial increase in its share price over the course of the past year and is currently trading at $279.46 with it 52 week low and high being $148.98 and $297.05 respectively.  Overall the stock has a 52 week total return of 45.4%.  As the stock was pitched to the AIM fund on 03/31/2017 when its price was at $214.22 with a price target of $262.88 a substantial 30.45% return has been captured.  The reasons for the excellent performance include; the increase in online and mobile adoption in Latin America and MercadoLibre’s dominance of the market of online commerce which as an industry is  projected to grow at a CAGR of 16% YoY in the region.

Past Year Performance: MELI has had a fantastic increase in revenues and customers across numerous areas of its business in the past year with consolidated net revenue growing by 29.6% YoY to $844.4 million USD. MercadoPago ended 2016 with 138.7 million total payment transactions representing an increase of 72.6% YoY with their most recent quarter, Q2 2017, continuing this trend up 63.3% YoY.  Additionally MercadoLibre marketplace revenue grew by 73.7% YoY in USD, and 85.2% YoY on an FX neutral basis in Q2 2017.

However, MELI did have a contraction of its margins due to an increased emphasis on increasing free shipping in Brazil which generates (53.9%) of the company’s revenues.  The current EBITDA margin for the company is 13.6% after previously being ~26% prior to the change in shipping policy.

Source: FactSet

My Takeaway

MELI has had a tremendous increase in both revenue and customers over the past several years with continued potential for growth. Projections of a top-line revenue increase are at 50% for 2017 and average 28% through 2021 indicating that the company will continue to grow with its customer base that will be close to 325 million (191 million currently) by the end of that period. Additionally as the company remains a strong candidate for a potential takeover from a larger global e-commerce company shares would likely be purchased at a substantial premium ensuring potential for future return. 

Although the margin contraction is of some concern it is standard for ecommerce companies to take losses in this area initially with the goal of continuing their diversification of business and expanding their customer base. Therefore it is recommended that MELI remain in the AIM International Equity Fund due to its high likelihood for further return.

Source: FactSet