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Morningstar | Strategic Investments Could Accelerate MercadoLibre's Payment/Logistics Plans, but Fully Priced In

Shares of wide-moat MercadoLibre are up almost 9% in the past week on the heels of a $1 billion public equity offering as well as strategic investments from PayPal ($750 million common stock investment) and growth-oriented investment firm Dragoneer Investment Group ($100 million convertible preferred stock). In our view, these investments not only reinforce our longer-term positive bias on the company, but with MercadoLibre having open lines of communication with PayPal's operation team, we see multiple ways for the company to accelerate its longer-term online and offline payment aspirations, including mobile point-of-sales systems, QR in-store payment network, and peer-to-peer payment enhancements. We also believe this round of funding will help MercadoLibre further its logistics plans, including the buildout of its "proprietary network," a warehouse and transportation management system that effectively stitches together first-mile carriers, middle-man carriers, fulfillment centers, and sortation centers.

We acknowledge that collaborative financial technology solutions between MercadoLibre and PayPal could offer upside to the assumptions currently underpinning our $400 fair value estimate, including 27% average annual top-line growth for the five years from 2019 to 2023 and EBITDA margins growing from 4.9% in 2019 to the midteens by 2023. However, until we learn more about these collaborative efforts, we'll assume that the upside benefit will be effectively offset by dilution from the common equity offering. While we believe MercadoLibre's payment and logistics capabilities are incremental to the network effect behind our wide moat rating and should unlock vendor and user monetization opportunities, the current market price may be pricing in more aggressive assumptions than we're willing to give the company credit for. As such, we believe investors should exercise some caution and wait for a better entry point.

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 was 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." While MercadoLibre appears to be on more investors' radar screens following this week's equity offering, our discussion with Sandler provided greater color regarding the company's longer-term payment and logistics plans as well as capital requirements necessary to achieve these plans.