2018 was a year of uncertainty for investors in MercadoLibre (NASDAQ:MELI). The Latin American e-commerce provider was besieged with unexpected postal rate hikes, a truckers strike, and an accounting rule change that made its results appear weaker than under the old standard.

MercadoLibre made a number of operational changes to address its falling profitability, and investors were hoping they would begin to see the fruits of its labor. Investors got what they were looking for and more.

A cartoon mural showing the vast number of items for sale on MercadoLibre's online marketplace

Image source: MercadoLibre.

For the fourth quarter, MercadoLibre reported net revenue of $428 million, up 20% year over year, but up an astonishing 62% in local currencies. This easily exceeded analysts' consensus estimates of $410 million. The company produced a net loss of $2.3 million, a vast improvement compared to the $67.7 million loss in the prior-year quarter. Adjusting for the foreign exchange loss of $3.9 million -- the result of weakness in the Argentine Peso compared to the U.S. dollar -- MercadoLibre would have been profitable for the quarter. The company generated a loss per share of $0.05, compared to a loss per share of $1.53 in the year-ago quarter. It was also better than the loss of $0.13 expected by analysts.

Enhanced marketplace revenue grew 14% year over year, but it was up 52% in constant currency. Non-marketplace revenue was even stronger, up 27% compared to the prior-year quarter, but up 74% in local currency. This was driven primarily by the strength of the company's payments business, Mercado Pago.

The three to watch

Metric

Q4 2018

Q4 2017

Change (YOY)

Confirmed registered users

267 million

212 million

26%

Items sold

86 million

81 million

5%

Payment transactions

126 million

73 million

72%

Data source: MercadoLibre fourth-quarter financial release. YOY = year over year.

While the strong dollar continued to mask MercadoLibre's growth, other non-financial metrics reveal the strength in the company's underlying business.

User growth has remained remarkably robust, growing at about 20% year over year -- or more -- going all the way back to 2011. 

As a result of the unexpected increase in postal rates last year, MercadoLibre eliminated shipping subsidies on some items, removed other smaller items from its website completely, and levied a flat shipping fee on the remaining smaller items selling in Brazil. As a result, items sold grew just 5% year over year.

This is what's driving the growth

The biggest takeaway, though, is the accelerating payments growth. Payment transactions increased to 126 million, up 72% year over year, resulting in total payment volume (TPV) of $5.3 billion, up from $4.3 billion in the prior-year quarter.

On the conference call to discuss the results, MercadoLibre CEO Pedro Arnt said the off-platform payments business will soon overtake the on-platform business, as a growing number of e-commerce sites and brick-and-mortar retailers adopt MercadoPago as a preferred payment method. TPV outside the platform topped $2 billion for the first time during the fourth quarter. 

"We envision Mercado Pago as a powerful disruptive provider of inclusive financial technology solutions," Arnt said. "In particular, for those segments of the population who have been historically underserved." 

The company's mobile point of sale (MPoS) system continues to grow "triple digits" in both U.S. dollars and local currency. Consolidated MPoS TPV grew 365% year over year in constant currency as the company continues to expand its base of installed devices in Brazil and Argentina -- its two largest markets. 

It's easy to see why MercadoLibre is putting so much emphasis on its payments business -- the number of payment transactions has grown north of 60% year over year for 16 consecutive quarters. 

A person holding a smartphone near a mobile payment device

Image source: Getty Images.

The profits will come

Several quarters of significant losses for MercadoLibre gave many investors pause. The company's management countered, saying they were working to achieve the right balance of growth and profitability. After a net loss of $67.7 million in the prior-year quarter, the company lost just $2.3 million in the current quarter. Considering that all of that loss and more can be explained by the foreign exchange loss of $3.9 million, it looks like MercadoLibre may have cracked the code.