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Morningstar | MercadoLibre Heads Into 2019 With Improved Growth/Profitability Balance, Offline Payment Momentum

MercadoLibre ended a transitional 2018 on a positive note, highlighted by stabilization of the shipping subsidies and other logistics investments that have fueled recent growth but also weighed on profitability and the adoption of new fintech innovations in several markets. While we expect management to prioritize market share over profitability the next two years with continued investment in payments, logistic services, or other commerce and nonmarketplace services, we believe our 2019-23 outlook for average annual currency-neutral revenue growth in the mid-20s and mid- to high teens adjusted EBITDA margins (compared with 2.6% margins in the fourth quarter) is valid. We plan a modest increase to our $340 fair value estimate for the time value of money, and while we see the shares as fairly valued, we wouldn't be surprised to see the stock continue to attract interest from investors looking for emerging-market growth stories.

Despite uneven Latin America macro conditions, MercadoLibre posted strong marketplace metrics including currency-neutral gross merchandise volume growth of 18% (representing sequential acceleration on a two-year basis), unique buyers increasing 7%, a 30% reduction in mean delivery times, and healthy items sold per unique buyer (down 1.8%) despite the impact of last quarter's flat fee introduction in Brazil and reduction in free shipping subsidies. While Brazil will weigh on near-term GMV, we believe these metrics reinforce the network effect behind our wide moat rating and will preserve marketplace integrity as new entrants attempt to grow in the region.

We also see tremendous potential in off-platform payments, including mobile payments (with QR payment growth at many large retailers being a key highlight), seller credit, and asset management. With 45% of payment volume and more than half of transactions taking place off MercadoLibre's marketplaces, we think average annual payment volume growth can exceed 30% the next five years.

On Dec. 6, 2018, Morningstar hosted a call with Federico Sandler, MercadoLibre's head of investor relations, to discuss the company's prospects and the moves it is making to adapt to an evolving Latin American consumer environment and capitalize on future growth such as logistics, offline payments, asset management, and credit services. A transcript of that discussion can be found in our Dec. 20 piece, "MercadoLibre: The Under-the-Radar Wide-Moat Stock."