Despite a bear market and the threat of recession looming over world economies, some businesses actually stand to benefit from the COVID-19 pandemic. But beware of the pundits pushing short-term coronavirus plays -- look for long-term business or consumer trends. The current health crisis will certainly change things, providing opportunities for savvy companies.
For one such example, look no further than Latin America e-commerce giant and payments processor MercadoLibre (NASDAQ:MELI). Its stock has fallen further than the market averages in the past several weeks, and yet it's reporting triple-digit revenue growth in Mexico.
Yes, you read that right.
Sales grew how much?
According to Mexican publication Milenio Diario, MercadoLibre's sales have gone parabolic. Mexico, like its U.S. neighbor to the north, has implemented social distancing guidelines for its citizens, disrupting normal retail economic activity. It just so happens that this country is one of MercadoLibre's primary markets, along with Argentina and Brazil.
Just how hot are sales in Mexico? MercadoLibre reportedly provided Milenio with some numbers. Right now, pharmacy sales are up 114%, and home and laundry sales are up a whopping 403%.
These are incredible numbers, but it's worth noting that MercadoLibre is used to robust growth in Mexico. In the fourth quarter of 2019, gross merchandise volume (GMV) in Mexico was up 53% year over year. That clearly shows consumers were already embracing MercadoLibre's platform in Mexico at a rapid pace, though the pace did decelerate slightly from the 56% growth reported in the fourth quarter of 2018. But as people in Mexico are now encouraged to stay home, MercadoLibre's growth is reaccelerating at a triple-digit pace in certain categories.
It shouldn't be surprising
As startling as it is to read about growth north of 400%, it's not unlike retail trends in the U.S. Certain companies are experiencing unprecedented demand for essential items. In fact, uniquely positioned sellers of essential items, like Walmart, Amazon, and Kroger, are on hiring sprees to meet demand, even while less fortunate businesses are forced to lay off employees. Demand for consumer staples is so high at Amazon that it's had to delay shipments of nonessential items up to one month.
MercadoLibre is a logical candidate to experience a similar sales bump, which gives credibility to the numbers being reported in Mexico. But given this reality, it's not far-fetched to assume that MercadoLibre is experiencing high demand in other countries throughout Latin America. While Brazil's response to the coronavirus has been mild, countries like Argentina and Colombia (another country in which MercadoLibre operates) have strict obligatory quarantines in effect. In countries like this, an e-commerce giant like MercadoLibre can prove its worth.
Why it really matters
Here's a (hopefully) humorous example to distinguish short-term and long-term demand. Imagine shoppers hoarding one year's supply of toilet paper because of the coronavirus. That's great for a toilet paper company's results in the current quarter, since a full year's worth of revenue is recorded all at once. However, unless shoppers plan to use the restroom more frequently, the revenue boost isn't sustainable. Toilet paper purchases will fall in coming quarters as people simply use up their hoarded supply.
With MercadoLibre, by contrast, the COVID-19 quarantines can provide a lasting boost to its business, because they drive adoption. No doubt some existing MercadoLibre users are buying in larger quantities, which isn't a sustainable bump to revenue. But how many shoppers are using MercadoLibre for the very first time? I would bet that quarantines and shelter-at-home orders are driving many to give it a try out of necessity. And once a person experiences the convenience of e-commerce, it can be hard to go back to brick-and-mortar retail.
And here's the icing on the cake: MercadoLibre's e-commerce operations are just one part of its business. The other part is Mercado Pago -- its payment-processing arm. While its e-commerce operations are growing, its payments business is the true growth vehicle. In the fourth quarter, transactions increased 127% year over year.
As the marketplace grows, Mercado Pago should grow with it. Consider that Mercado Pago has 94% penetration on its platform. This makes Mercado Pago one of the most convenient payment choices for a new MercadoLibre user and another long-term beneficiary from the coronavirus.
What it means for now
MercadoLibre's management has long said that e-commerce and digital payments are still young throughout Latin America, providing the company a very long growth runway. Past growth numbers have backed these statements up. But the COVID-19 pandemic could accelerate its progress, as consumers need MercadoLibre's services now more than ever. This should be an enduring tailwind rather than just a temporary boost. If you haven't already considered buying this stock, you should give it a hard look while the bear market continues to suppress its share price.