South America-based MercadoLibre (NASDAQ:MELI) might be best thought of as an integrated ecosystem of e-commerce services operating within many Latin American markets. This ecosystem includes a marketplace platform where third-party sellers can list products for sale, a digital payments platform, virtual classifieds, a marketing and advertising platform, and a logistics and delivery system. In Argentina, MercadoLibre has even launched an asset management platform. The company is obviously seeing a good deal of success, and based on web traffic, it is the e-commerce leader in Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, and Uruguay.
More than most domestic companies, MercadoLibre is besieged by competitive and geopolitical risks unique to the regions in which it operates, while simultaneously presented with enormous opportunities due to those same regions' underdeveloped markets. As these competing thoughts take turns capturing investors' imaginations, Mercado's stock price has been known to fluctuate wildly. From last March to Christmas Eve, the stock price plunged 38%, only to climb 34% from its holiday lows to the present day. With the stock still down about 15% from its all-time highs, let's take a closer look to determine if this Latin American e-commerce company might be a good fit for your portfolio.
Crunching the numbers
In the company's 2018 third quarter, revenue rose to $355.3 million, an incredible 58.3% increase year over year. This top-line growth was spurred by growth in its online marketplace, which facilitated the sale of 83.5 million products, a 12.5% increase over 2017's third quarter. Meanwhile, gross merchandise volume (GMV) grew to nearly $3 billion, a 27.9% increase (both growth rates adjusted to make foreign exchange neutral).
Investors found little cause for concern in Mercado's growth or revenue but, rather, in its increasing costs and disappearing earnings. Total operating expenses increased almost 22% to $180.7 million, while earnings per share (EPS) came in at a loss -- yes, a loss -- of -$0.23. That's down from a positive EPS of $0.63 in 2017's third quarter. How can a once-profitable company show so much growth but still see earnings decline at such a drastic rate? What's behind this seemingly contradictory tale told by the company's latest quarterly results?
Causes for concern
MercadoLibre investors certainly endured a turbulent year in 2018, with a number of events taking their collective pound of flesh from its profitability. In December 2017, MercadoLibre decided to deconsolidate its operations in Venezuela. In the company's 2017 fourth-quarter conference call, CFO Pedro Arnt explained this decision, stating, "We have determined that we no longer have full accounting control of our subsidiaries in that country as a result of Venezuela's recent selective default determination, of increasingly restrictive exchange controls, sanctions on government officials, and other operating restrictions that have hindered materially our ability to make key financial decisions for that market."
The loss of its Venezuelan market obviously stung, but was hardly life-threatening. For instance, without the impact of Venezuela, MercadoLibre's GMV would have increased by 38%, not 28%, in its most recent quarter. However, the move signified something more than just the loss of one of Mercado's markets; it underlined the geopolitical instability in which the company must operate.
The company also saw growth in the number of items sold in Brazil, due to flat shipping fees added to orders under a predetermined amount. Arnt admitted this move was "self-inflicted" in the company's 2018 Q3 conference call, but said it "comes with the intended benefit of growing average ticket levels, that drive the improved economics for our free shipping program that we were able to deliver during the quarter."
Finally, MercadoLibre is seeing an increased interest in Brazil from Amazon.com, Inc (NASDAQ:AMZN), whose presence is often reason enough to send skittish investors toward the exits. Yet with Amazon having sold books in Brazil for nearly six years, and electronics and other assorted products since late 2017, MercadoLibre is still showing strong growth in the region.
Reasons for optimism
Despite these concerns, none of which should be taken lightly, MercadoLibre is a company investing heavily in growth, an action that often leads to volatility and an immediate hit in earnings. With the company having many irons in the fire, these investments seem to be paying off. Investors should consider the growth being experienced in the company's other divisions, beyond its core marketplace business. .
MercadoPago is a digital payments solution that is fully integrated with Mercado's checkout process, so users can pay quickly and securely online or via its app, a payments feature that is rarer in Latin America's developing markets than consumers elsewhere are used to. In the company's Q3 conference call, Arnt discussed the evolution of MercadoPago's digital wallet capabilities :
Through the MercadoPago wallet, an individual can set up our mobile wallet within minutes and be able to send peer-to-peer payments, top up his mobile device, pay for utilities, store money, and pay physical world merchants via our growing QR payment network. As we continue to build greater ubiquity and add more usage cases to our two-sided network, total payment volume from the mobile wallet on an FX-neutral basis, should also continue to grow triple digits year-on-year in Brazil, Argentina, and Mexico as it did during the third quarter of 2018.
MercadoEnvios, the delivery and logistics platform for sellers in Argentina, Brazil, Chile, Colombia, and Mexico, is also making strides in performance and growth. Items shipped through the platform grew to 54.3 million, a 30.2% increase year over year. This growth could be the result of the platform's growing capability to deliver items within 48 hours of being ordered, a much more difficult feat in some South American regions than in the U.S. In Q3, the items shipped within this time frame rose 15% over 2017's third quarter, with particular success being seen in Mexico, where 80% of all merchandise is being delivered within the time frame.
The true value of MercadoLibre
In many ways, MercadoLibre reminds me of Amazon or Alphabet in that there are so many moving parts it is hard for individual investors to keep track of them all. But this is something I believe more investors should look for in the companies they invest in. Motley Fool co-founder David Gardner calls this "optionality," defined as a company that has "many possible futures." This gives the company chances to pivot its business model when it sees opportunities or when facts on the ground change.
Within the next decade, it is entirely possible MercadoLibre's digital wallet business will dwarf its marketplace, or the company will be better known as a shipping and logistics company than a selling platform. While that may seem unlikely now, how many Amazon shareholders thought Amazon Web Services (AWS) would be its most profitable segment? How many thought Instagram would be Facebook's smartest investment when it was first acquired?
While the company's bottom line has definitely taken a hit as it reinvests money back into its business, MercadoLibre seems to be one of those companies with many possible futures that will likely reward patient shareholders handsomely.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Matthew Cochrane owns shares of Alphabet (A shares), Amazon, and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, and MercadoLibre. The Motley Fool has a disclosure policy.