E-commerce in Latin America is still in its early innings, with online purchases accounting for just 4% of total retail sales in 2019. By contrast, digital purchases represented about 11% of total sales in the U.S. during the same period, showing that there's plenty of room for growth in the nascent market.
The COVID-19 pandemic accelerated adoption of e-commerce in many markets around the world. Consumers opted to order online and have packages delivered rather than risk venturing out and contracting the disease.
This was especially true in Latin America, where 13 million consumers made an e-commerce purchase for the first time last quarter, according to payment processor Visa.
First, a little perspective
Consumers in Latin America went all-in with e-commerce as the region reeled from the impact of the novel coronavirus. During May alone, downloads of shopping apps in the region grew 43% year over year, according to data provided by Apptopia.
Two countries, Brazil and Mexico, accounted for the majority of the growth, with shopping app downloads increasing by 68% and 39% year over year, respectively.
Among the 19 most popular apps tracked by Apptopia, the year-to-date numbers were even more eye-catching, as app installations in Brazil grew 99% compared to the prior-year period, while those in Chile jumped 59%.
The hometown favorite
MercadoLibre absolutely dominated the competition, garnering more mobile app sessions than its next two competitors combined between June 2019 and May 2020. Since the report focused primarily on Latin American e-commerce, Amazon.com (NASDAQ:AMZN) wasn't included in the study. However, even if it had been, that wouldn't have changed MercadoLibre's first-place ranking, as the company had 52% more mobile app sessions during the period than Amazon.
The strong demand for its app translated to robust results for MercadoLibre. During the first quarter, the company reported that revenue grew 71% year over year in local currencies, though that number was boosted by strong growth in digital payments. Online sales grew 62% as adoption of e-commerce ramped up.
How do you want to pay for that?
The aforementioned payments also helped strengthen the company's ecosystem. Latin America has historically been cash-based, so millions of residents still don't have a bank account or a credit card.
MercadoLibre developed Mercado Pago, a payment system modeled after PayPal, that let consumers add money to their digital account at a network of locations like convenience stores. By providing a way to pay for online purchases, the company added another growth engine to its network. Mercado Pago became so popular with users that it soon expanded beyond MercadoLibre's platform to other digital sellers, eventually making the jump to brick-and-mortar stores.
The payments business is growing even faster than e-commerce, with fintech revenue soaring 83% year over year in local currency.
The combination of its industry-leading e-commerce platform and digital payments form a virtuous cycle that should support MercadoLibre's growth for years to come.
Paying for quality
MercadoLibre stock recently hit all-time highs on the strength of its position in the region and the accelerating adoption of e-commerce in Latin America. As a result, the stock is by no means cheap, trading at 19 times trailing-12-month sales and a forward valuation of 15 -- when a reasonable price-to-sales ratio is generally considered to be between one and two.
However, considering the significant pivot toward e-commerce and digital payments in the region, and MercadoLibre's dominant position in each, investors would do well to remember the adage, "You get what you pay for."