By:
Arsh K. Salwan, 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.
Summary:
• MercadoLibre, Inc. (NASDAQ: MELI) is a company located in Latin
America that operates in the e-commerce area. MercadoLibre is a marketplace
platform where consumers can buy and sell products.
• MELI offers six
e-commerce services: Marketplace, Classified Services, Payments, Advertising,
Online Webstores and Shipping. The company is broken down into two segments:
Marketplace (60% of revenue) and Non-Marketplace (40%).
• MercadoLibre has had a
solid revenue stream with a 3-year CAGR of 28.96% and is expected to continue
to grow.
• The company launched
their same-day delivery tool in late August, MercadoEnvios Flex. This will
allow independent carriers to pick up and deliver products within the same day
to customers.
• MELI officially
launched their QR-code payment tool. Management believes that 25% of Brazillian
smartphones carry at least one of MercadoLibre’s apps which will be compatible
with the new QR feature.
• The stock price has
increased by 9.71% YTD.
Key
points:
Within the last couple of years, MercardoLibre has
emerged as one of the world’s many e-commerce giants. With the revenue primarily
coming from Brazil (59.5% as of FY17), Argentina (25.7%), and Mexico (6.2%),
the company has capitalized on the emerging markets. 2017 was considered to be
MercardoLibre’s breakout year, reporting 65.57% YoY revenue growth. Most of this growth was credited to the
increase in users in MercadoLibre’s mobile phone applications.
The good news for MELI is
that growth has continued: YoY growth was 17.18% and 5.95% in Q1 and Q2 of
2018, respectively. The bad news for MELI is that expenses grew at a very large
amount, resulting in negative Operating Income for Q1 and Q2 of -29.42 and
-28.24, respectively. Because of the
recent poor performance, MELI missed earnings in Q4 2017, Q1 2018, and Q2 2018.
The company attributed these results to abrupt changes in the cost structure
due to their free shipping offering that was in rapid expansion.
Some of the risks that
MercadoLibre faces are regulation changes from the government, increased
control of tax collection, currency risks, and increased competition. Along
with these risks, the company faces shipping cost risks. Over the past two
quarters, two events had significant impact of cost of goods sold: a price hike
from a postal partner and a strike called by truckers during the second
quarter.
On the bright side, the
company can capitalize on future growth by way of product launches such as the
new QR features, and geographic expansion. In Q2 2018, the company announced
YoY growth of 71% in Mexico, 51% in Colombia, 42% in Chile, and 84% in Uruguay.
Management also expects their MercadoPago payment service to benefit from the
overall increase in marketplace volume.
What
has the stock done lately?
MercadoLibre has had a
tough previous couple of quarters resulting in lower than expected earnings in
the last three quarters. MELI announced earnings on August 8th 2018
for Q2 2018, from August 9th-20th, the stock price
dropped ~17%. Since then, the price is up around 11%.
Past
Year Performance:
MELI’s stock price has increased 9.71% YTD,
however, the stock should be watched closely due to the recent volatility. For
example, on March 9th 2018, the share price reached $413.94, 14.5%
above where it currently sits. The price has fluctuated since the end of August
but shows signs of stability.
Source:
FactSet
My
Takeaway:
With MercardoLibre’s
historic growth, it has been a great story and interesting company to study.
Recent tax increases, currency fluctuations, and increased shipping costs have
drawn eyes to the company as these have caused the missed earnings expectations
in the previous 3 quarters. Something to watch, however, is the impact of the the
same day shipping program as well as the newly introduced QR code functions. Due
to these factors, I recommend a hold position on MELI. It will be interesting
to see how the company performs in Q3.
Source:
FactSet
