Morningstar | MercadoLibre Growth/Profitability Balance Act Goes on, but Network Effect Offers Long-Term Potential
The balancing act between growth and profitability continued during MercadoLibre's second quarter. Platform price increases to offset postal rate hikes from Brazil national carrier Correios in March, a 10-day trucker strike in Brazil in May, and a reduction in free shipping offers weighed on gross merchandise volume, which decelerated to 15% growth from 34% last quarter, while logistics, loyalty program, marketing, and off-platform payment investments led to an operating loss of $28 million. That said, we think there is still evidence of a powerful network effect--the basis of our wide moat rating--including acceleration in items purchased per unique buyer (up 20%, with newer user engagement trends suggesting increased retention/lifetime value) and live listings (up 50% year over year). We also remain encouraged by the ways that this network effect is driving growth in off-platform payments (up 132% year over year on a constant-currency basis, aided by more widespread mobile point-of-sale adoption), advertising (up 65%), and credit offerings.While the market is focused on whether Brazil disruptions and other investments will weigh on near-term results, we still see a path to mid- to high 20s top-line growth and midteens EBITDA margins over the next five years (versus expectations of low to mid- 20s revenue growth and low-single-digit EBITDA margins this year) and don't expect material changes to our $340 fair value estimate. While there are factors that could result in near-term disruptions--including more free shipping reductions and cross-docking center improvements to reduce its dependence on Correios--improved user engagement trends and the scaling of nascent business lines give us confidence that recent margin pressures are a byproduct of changes to strengthen its competitive position rather than structural industry trends. While we see shares as fairly valued, we still view MercadoLibre as the best way to participate in Latin America e-commerce growth.
MercadoLibre is engages in an online commerce ecosystem. Co.'s platform is designed to provide users with a portfolio of services to facilitate commercial transactions. Co. integrated e-commerce services includes: the MercadoLibre Marketplace, which is an automated, topically-arranged and user-friendly online commerce service; MercadoLibre Classifieds Service, which users can also list and purchase motor vehicles, vessels, aircraft, real estate and services; MercadoPago payments solution, providing a mechanism that allows its users to send and receive payments online; and MercadoLibre advertising program, which enable businesses to promote their products and services on the Internet.
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