Morningstar | MercadoLibre's Growth/Profitability Balance Stabilizing as New Payment Opportunities Emerge
MercadoLibre's third-quarter update was accentuated by two important themes: signs of stabilization for the shipping subsidies and loyalty program investments that have fueled recent growth but weighed on profitability, and new FinTech opportunities in several key markets. Although we will adjust our model for the timing of logistics (namely first-party warehouse and fulfillment functions) and payment initiatives, we believe our five-year targets of average annual currency-neutral revenue growth of 28% and mid- to high teens adjusted EBITDA margins are still valid, leaving our $340 fair value estimate unchanged. We see shares as fairly valued but wouldn't be surprised to see the stock continue to attract investors looking for global growth stories outside of China.Despite uneven macro conditions across much of Latin America, MercadoLibre's strong marketplace metrics--including currency-neutral GMV growth of 28% (representing sequential acceleration on a two-year basis), unique buyers (up 10%) and items sold per unique items up in every market except Brazil (where a flat fee of BRL 5 was implemented and listings under BRL 6 were removed to insulate margins) despite a reduction in free shipping subsidies--reinforce the network effect behind our wide moat rating. While Brazil will weigh on near-term GMV trends, we believe the aforementioned measures will help to preserve the integrity of its marketplaces as new entrants attempt to grow in the region.
We continue to see tremendous potential in MercadoLibre's off-platform payment services, including mobile payments solutions (including greater adoption of digital wallet, in-app payments software development kit, mobile point-of-sale solutions), seller credit alternatives, and asset management and other financial services. With 40% of payment volume currently taking place off the company's marketplaces--up from 30% a year ago--we're comfortable average annual payment volumes will grow 35% next five years.
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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