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Morningstar | Off-Platform Payments, Marketplace/Logistics Enhancements Bolster MercadoLibre's Long-Term Potential

We find there are three important takeaways from MercadoLibre's strong start to 2019, which was accentuated by 93% constant-currency revenue growth and a return to positive operating margins for the first time in five quarters. First, payments are becoming as important as (and may surpass) its marketplaces to future cash flow. We've long thought that a strong network effect can allow e-commerce players to unlock incremental growth, and while we've highlighted Amazon and Alibaba for this in the past, it's clear that MercadoLibre's payment platform is also building a network effect of its own and supporting our wide moat rating. Constant-currency payment volume grew 83%, with off-line payments composing 49%. With mobile POS devices, mobile wallet, and QR code in-store payments, asset management, credit services, and single-payer solutions gaining traction, we now believe 30%-plus average revenue growth is possible the next five years (versus our previous outlook of 28%).

Second, marketplace enhancements (improved search/discovery), category expansion (CPG and apparel), and moving more shipments to its cross-docking and fulfillment logistics solutions should bolster buyer/seller engagement while promoting new monetization opportunities. While payments also contributed, the 5-point increase in the take rate to 15.3% underscore how important marketplaces enhancements have become for Latam buyers and sellers.

Lastly, the return to profitability--a byproduct of marketing efficiency and shipping cost optimization in Brazil--confirms that there is still a long-term profitability story after two years of fulfillment/technology investments, and we see 20%-plus EBITDA margins as achievable within five years. We're planning a 10% increase to our $400 fair value estimate due to new monetization opportunities, and while we see shares as overvalued, we wouldn't be surprised to see the stock continue to attract interest from investors seeking emerging market growth stories.

On Dec. 6, 2018, Morningstar hosted a call with MercadoLibre Head of Investor Relations Federico Sandler 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."