MercadoLibre (NASDAQ:MELI) has been described as the eBay (NASDAQ:EBAY) of Latin America, but it is much more. The company connects buyers and sellers in a variety of ways and takes a piece of each transaction. This includes an auction platform, standard e-commerce platform, online classifieds, and car and real estate portals. Plus it has a payment platform, MercadoPago, that's very similar to PayPal (NASDAQ:PYPL).
One of the most challenging aspects of investing in MercadoLibre is being able to determine whether the company is producing acceptable growth numbers. It has markets in 19 Latin American countries and does business in the local currencies of each, while reporting financial results in U.S. dollars. With currencies moving in different directions and exchange rates varying from country to country, you might think you would need a master's degree in currency exchange to decipher the results.
Clear as mud
MercadoLibre's earnings press release for the first quarter of 2016 provides a great example:
Net revenues for the first quarter were $157.6 million, a year-over-year growth of 6.4% and 75% in local currencies. Excluding Venezuela, Net revenues grew 8.5% in USD and 56.9% in local currencies.
Considering the vast differences reported between U.S. dollars and local currencies, investors need a simple way to get past these exchange rates and find the heart of the growth story. Fortunately MercadoLibre reports three metrics investors can use to do just that.
A user by any other name
As with any e-commerce platform, a key to increasing revenue is growing the user base; more users can translate to greater revenue. One metric MercadoLibre investors should follow each quarter is the number of total confirmed registered users. The company has grown its user base 22% on average over each of the past five years. This growth has been decreasing but was still at a healthy rate of 19.6% for all of 2015. If this number begins to show signs of slowing significantly, investors should take heed.
While products have different prices (and product mix will typically obfuscate the issue), selling more products is generally a good indicator of increasing growth. Each quarter MercadoLibre reports the number of items sold as part of its financial release. For the previous five years this metric has grown at an average rate of 26% annually.
The year-over-year growth trajectory of items sold has climbed steadily:
So far in 2016, the growth rate in number of items sold has been near 40%, thanks to an increasing customer base and each customer purchasing more items, on average. This number should continue to grow, though likely not at such an accelerated rate.
Show me the money!
MercadoPago is a flagship product in MercadoLibre's portfolio of services facilitating e-commerce. It provides a payment solution in an area of the world that has historically seen lower credit card usage. The similarity to PayPal before it was spun off from eBay is no coincidence; eBay was the largest shareholder of MercadoLibre until it recently sold off its shares. MercadoPago was likely modeled after PayPal, as eBay mentored MercadoLibre in its early days.
Another key growth metric for the business is the number of payment transactions. If they are increasing, the business is probably doing alright even as it weathers quarterly currency fluctuations.
The number of payment transactions has increased at an average annual rate of 62% over the last five years. Total payment transaction has nearly tripled in the last nine quarters alone:
So far in 2016, the growth rate has increased to over 70%. Why the increase? Several years ago MercadoLibre began to offer this payment solution to off-platform merchants, which caused growth to reaccelerate. As the addressable market for off-platform payments is considerably greater than the one on-platform, growth in payments will likely continue to be robust as off-platform penetration increases. Any significant decrease in this growth rate would bear watching.
The Foolish bottom line
A review of these three metrics shows that MercadoLibre's growth is robust and on track. While exchange rates will continue to muddy the waters regarding MercadoLibre's results, these metrics provide a consistent way to monitor growth and provide a clearer understanding of the future of this Latin American powerhouse.