Some might think that shares of MercadoLibre (NASDAQ:MELI) would be up, not down, amid the coronavirus outbreak. After all, the company is the dominant e-commerce platform in Latin America, with a strong leading position in Brazil, Argentina, and Mexico, while serving smaller countries as well. In the age of the COVID-19 outbreak, one would think e-commerce would be surging, boosting MercadoLibre's shares along with it.
Instead, MercadoLibre's stock is off about 25% from its recent all-time highs set back in February. That's in contrast to some other global e-commerce companies that have held up much better. So what gives, and does MercadoLibre's recent discount make it a buy?
As much a payments company as an e-commerce company
One big thing to know about MercadoLibre is that its payments product, MercadoPago, is now nearly just as big as its e-commerce operations. It's not unlike how PayPal (NASDAQ:PYPL) emerged as a business within eBay (NASDAQ:EBAY) to make online payments, before being spun off into what is now a much bigger company.
In fact, during 2019, MercadoLibre made practically just as much revenue from its non-marketplace businesses as its marketplace business. In some countries, the non-marketplace business, including payments, financing, and credit -- is actually larger than the marketplace in terms of revenue.
That's probably why MercadoLibre has fared a bit worse than other e-commerce companies during the COVID-19 sell-off. In a recession or depression, overall spending volume goes down, while more customers and merchants may default on their loans. MercadoLibre does hold some credit risk with its merchant and consumer financing products, so its results could take a hit if defaults pick up. MercadoLibre has also financed some of its growth by selling its loans to third parties, so if that dries up, MercadoLibre could have less growth capital to work with.
Will e-commerce be as good as expected?
Obviously, with social distancing policies likely to be implemented in Latin America -- especially as the Southern Hemisphere is soon entering winter -- some think e-commerce marketplaces should accelerate in the region, even over the already-high growth rates MercadoLibre was posting last year.
However, it should also be known that MercadoLibre doesn't have a huge selection of consumer staples, at least compared with other leading e-commerce platforms in more developed regions. In fact, on the recent conference call with analysts, management disclosed that the high-frequency consumer staples times accounted for only "mid-single digits" in terms of the company's marketplace revenue.
Nevertheless, management did say that the category was growing at twice the pace of the overall platform. Therefore, it's possible the fast-moving consumer goods category could accelerate amid COVID-19. There has actually been evidence of this in Mexico, where MercadoLibre saw a 114% growth in pharmacy and 403% growth in home and laundry sales, according to Mexican newspaper Milenio Diario last month. Mexico is the company's most-developed market for these types of consumer staples products, so it's unclear if MercadoLibre will see as big of a boost in Brazil or Argentina, or if it will be enough to make up for headwinds across more expensive big-ticket items.
While these are very real negatives for MercadoLibre, the company is still a leader in a very strong growth category of Latin American e-commerce. According to eMarketer, e-commerce was only 4.2% of Latin American retail sales last year, as compared with North America's mid-teens proportion. The overall industry grew 21.3% in 2019, with mobile commerce accelerating at an even higher 36.3% rate -- the highest mobile commerce growth rate of any region in the world.
And while MercadoLibre is coming off another year of slight net losses, management had already predicted becoming more profitable in 2020, even before COVID-19. The amount of free shipping offered to sellers, which lowers net revenue, fell as a percentage of revenue in 2019 versus 2018, as the company better optimized discounts to encourage use of the company's fulfillment and logistics services. MercadoLibre also spent heavily on brand marketing in 2019, with sales and marketing spend rocketing 73%. In times of market stress, it's likely that marketing spend can come way down without much trouble if need be.
That marketing investment helped the company's impressive growth in 2019, with 20% user growth and 18% unique buyer growth. Revenue in local currencies rocketed 92%, although that was partially offset by a huge devaluation of the Argentine Peso of 41.7%. Still, in U.S. dollars, revenue growth on the enhanced marketplace was still a whopping 71% last year, while non-marketplace revenue grew 48.8%.
Coming into 2020, MercadoLibre was already looking to better-optimize for profitability, even before COVID-19 hit. On the fourth-quarter conference call, CEO Pedro Arnt said, "The sustained momentum we see gives us the confidence to move on to a phase where we continue to prioritize growth, but with a greater focus on driving cost efficiencies and scale benefits through our P&L and the P&L of the larger and more consolidated countries we operate. This will be one of main objectives for 2020."
Finally and perhaps most importantly, MercadoLibre also has a strong balance sheet, with about $3 billion in cash and cash equivalents and only around $815 million in loans payable as of Dec. 31.
Short-term uncertainty, long-term gain
Taking a look at the big picture, things could definitely get dicey for MercadoLibre in the near-term as it contends with the economic fallout of the coronavirus, especially in its payments and lending segments. Still, this doesn't change MercadoLibre's strong leadership position, or the strong long-term tailwinds of Latin American e-commerce.
That may be why MercadoLibre director Malka Meyer made a series of insider purchases in early March as the stock fell into the low-$500 range, increasing her stake by about 10% from 50,534 shares to 55,848 shares.
MercadoLibre's stock price is just a bit above that now, in the high-$500 range. Yet with insiders buying just below these levels, the long-term themes still intact, and with a rock-solid balance sheet, MercadoLibre looks like an attractive buy today after the COVID-19 crash.