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Is Latin America the Next E-Commerce Battleground?

By Motley Fool Staff – May 22, 2018 at 1:21PM

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With Walmart snatching up Flipkart in India, is MercadoLibre a potential takeout target?

In this segment from Industry Focus: Tech, analyst Dylan Lewis is joined by contributor Danny Vena to discuss MercadoLibre's (MELI -0.23%) competitive advantages against larger online players and whether the company would make an attractive acquisition.

A full transcript follows the video.

This video was recorded on May 18, 2018.

Dylan Lewis: We actually got some questions from one of our listeners, Simon, about some of these issues. He asks us, "I was interested to know what your thoughts are on Mercado. Specifically because of the deal Walmart announced for Flipkart, I can't help but think South America is emerging as another battleground for e-commerce." I think that speaks to the move that we saw with Amazon coming to Brazil a little bit. How do you feel about Mercado in Brazil and South America with a potentially larger player coming in there, Danny?

Danny Vena: I think that you have to understand the market in Latin America a little bit in order to understand the dynamic. And one of the things that you're going to see is that, in Latin America, they are a population that doesn't have that much in terms of credit cards and in terms of checking accounts. This is, by large, one of the few remaining cash-based markets in the world. A lot of people still pay for things by cash.

Now, MercadoLibre set up their payment system, called Mercado Pago, and folks can stop by a local convenience store, they can pay money at the counter and reload their account, similar to what PayPal did years ago. This is something that they set up years ago, so it's very well-penetrated within the region. Folks are not only using that to buy things on MercadoLibre's website, but they have also expanded off of the platform, so folks now use this to pay utility bills and at other stores, as an example.

This is one thing that MercadoLibre has going in its favor to compete with somebody like Amazon. Another is the hometown factor. When you talk about the region, Latin America is much earlier on the road to internet penetration, to e-commerce, to online shopping. So, when you look at these, this is a hometown company that the folks that live there trust. And at least for the time being, that's going to give them more of a competitive advantage. And, I think they can still compete with Amazon because they have such a head start in many of these areas.

Lewis: Simon asked us a second question. I think this speaks to the value of what MercadoLibre has already built there. Would MercadoLibre make a good acquisition target for a giant e-commerce company that wanted to establish a footprint in that region? He specifically notes Walmart, Alibaba, possibly With what you just laid out, I would think the answer would have to be yes.

Vena: I agree with that, absolutely. I think that one of the things that you're going to see is consolidation in a lot of these international markets as Amazon ramps up. As big as the business is, and it accounted for something like 44% of the e-commerce growth last year, and maybe 4% of all online sales in the United States, it has not penetrated that far into international markets yet, although it's ramping up. One of the things that you're going to see is, there are going to be more mega deals like you saw with the bidding war between Walmart and And I think that Latin America is one of those areas in the world that's ripe for this type of consolidation. And I think there may be offers made for MercadoLibre in the near future, from one of these large e-commerce players.

Lewis: Particularly when you look at the size of the company, right? This is a $15 billion company, is that right? Somewhere in that neighborhood?

Vena: It is. It's firmly in the large mid-cap to small large-cap range. I think this is an easy acquisition to swallow for a large company. If you think about, I believe Walmart just paid, what was it, $16 billion for Flipkart?

Lewis: Something like that.

Vena: That puts MercadoLibre right in the same range in terms of how much somebody would have to pay to scoop up this company, plus whatever premium they had to pay. So, I think that's definitely a possibility. I don't know if they're interested in being acquired, but I think that there are definitely going to be companies out there that are interested in making such an acquisition.

Lewis: And, to be clear, there are some stocks that you buy because you think that there's an acquisition coming down the road, and it's that, this is more valuable in someone else's hands, basically. I think, with Mercado, this is a business that works, and it's a business that can continue to operate pretty well over the next five years. I'm a little worried about Amazon coming into that space, but I think that they've done enough to install themselves there that it's not a huge, huge worry for me.

So, when someone's buying this business, it's appealing in its own right. It's not like you're buying this stock thinking, ohh, someone will think it's more valuable than it currently is. You're buying a good business if you're owning this company.

Vena: I think that MercadoLibre will prosper whether or not Amazon gets into this space. Amazon may seem like they're invincible, but there are several historical precedents -- the Fire Phone, for instance -- where Amazon has not only failed, but failed spectacularly. And that's something that Amazon CEO Jeff Bezos has embraced. He understands there are going to be some places that he's going to fail. I think, if there's an area where Amazon has a tough time succeeding, I think Latin America is probably one of those, and I think MercadoLibre would be the reason.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of AMZN, MercadoLibre, and PYPL. Dylan Lewis owns shares of AMZN, MercadoLibre, and PYPL. The Motley Fool owns shares of and recommends AMZN, JD, MercadoLibre, and PYPL. The Motley Fool has a disclosure policy.

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