MercadoLibre (NASDAQ:MELI) has been remarkable in its ability to take command of the e-commerce market in Latin America. Yet because it operates in some countries that don't have the financial stability found in other parts of the world, MercadoLibre is vulnerable to adverse economic events that can have a dramatic impact on its financial results from time to time.
Coming into Thursday's fourth-quarter financial report, MercadoLibre investors were already prepared for some reductions in profit due to tough conditions in some of its key markets, and their high expectations for sales growth turned out to be quite reasonable. Yet MercadoLibre ended up taking a big hit from its business in Venezuela, and even beyond that troubled nation, the e-commerce business saw some challenges that investors will want to pay attention to. Let's take a closer look at MercadoLibre and what its results say about its future.
What happened to MercadoLibre?
MercadoLibre's fourth-quarter numbers showed continued sales strength but less-than-ideal conditions on the bottom line. Revenue overall soared more than 70%, to $437 million, which was even better than the 58% growth rate that most investors were looking to see. Yet the company reported a net loss of $67.7 million, and even after accounting for some one-time items, adjusted earnings of $0.20 per share were much worse than the $0.51 per-share consensus forecast among those following the stock.
As we've seen before, the business metrics that MercadoLibre reported pointed to sustained growth. Gross merchandise volume was higher by 63%, to $3.62 billion, and the number of items sold climbed by 57%, to 81.2 million. The number of listings that the e-commerce platform featured climbed 56%, to 114.2 million, and each unique buyer purchased an average of 4.6 items successfully, up from 3.9 this time last year. Confirmed registered user counts reached 211.9 million, up 22% during the past year, including 10.7 million new users just in the fourth quarter.
Ancillary services also did well, as MercadoPago showed even greater success on the payment-processing side of the business. Total payment volume soared 78%, to $4.34 billion, with 73.2 million transactions processed through the service. Brazil, Mexico, and Argentina have already been using MercadoPago extensively, but penetration rates in countries like Colombia and Chile also soared, topping the 80% and 75% marks, respectively. In the shipping division, MercadoEnvios saw an 87% rise in items shipped, to 48.3 million, and about three-quarters of all items in Brazil and Mexico are shipping through the service, with lower, but still-promising, numbers elsewhere in its network.
Yet the big factor hurting earnings came from Venezuela. As of Dec. 1, MercadoLibre decided that it no longer has control of its Venezuelan subsidiaries due to the country's actions, including operating restrictions in areas like foreign exchange and determination of default events. Accordingly, the company deconsolidated its Venezuelan operations. That forced the company to take an $85.8 million loss.
Can MercadoLibre make more money?
CFO Pedro Arnt was upbeat about the business prospects for MercadoLibre. "Some of the structural factors that underpin e-commerce and fintech in Latin America are beginning to take shape," Arnt said, "through the growth of the installed base of smartphones, increasing consumer familiarity and affinity with buying and transacting online, greater number of broadband users, rising demand for online financial services, and growing interest on behalf of traditional retailers and brands to find technology partners to support them in developing their digital strategies." The CFO thinks that MercadoLibre can capitalize on all of those fronts going forward.
MercadoLibre is also taking steps to try to enhance its business. The company reported "meaningful advances" in building up its classified ad business, making a transition toward a transactional model with a pilot launch in its key markets of Brazil and Argentina. In addition, the e-commerce giant has introduced huge numbers of mobile point-of-sale devices to support MercadoPago, and broader use of mobile devices has justified the investment that MercadoLibre has made in technology to adapt to the shift away from desktop-centered use of the platform.
One of those steps involved diverting capital away from paying dividends. MercadoLibre determined that it would be better for the business to use that money internally, and so it suspended its $0.60 per-share annual dividend to redirect cash toward multiple-platform projects.
MercadoLibre investors weren't happy about that and the shortfall on the bottom line, and the stock fell 7% in after-hours trading following the announcement. Yet given how Venezuela has been a tough market for the company for a long time, the decision to separate its Venezuelan business financially from the rest of its operations is likely to turn out well in the long run.