There's a document with a funny name that provides shareholders with deep insights into a public company's business and its growth strategy. This not-so-secret report, called a 10-K, is required by the SEC, published annually, and available to the public.
As I was reviewing MercadoLibre's (MELI +0.66%) latest filing, I noticed something that was hard to ignore. It'll make you think about this Latin American e-commerce and payments leader in a brand new way.
The change that's hiding in plain sight
As MercadoLibre's top-line revenues grew at a 29% compound annual growth rate over the last seven years, its information technology and product development team has grown at an even faster pace. Looking at its annual SEC filings over that time, this team has increased in size by more than 10-fold. For investors doing the math, this rate of change is mind-boggling, equating to hiring more a new employee every single workday for seven years -- and then 600 more on top of that!
|
2012 |
2019 |
Growth | |
|---|---|---|---|
|
Information technology and product development employees |
327 |
3,492 |
10.7x |
|
Full-year IT spend |
$28.6 million |
$223.8 million |
7.8x |
|
Full-year revenue |
$374 million |
$2.3 billion |
6.1x |
|
IT spend as % of revenue |
7.7% |
9.7% |
1.3x |
Note: Number of employees at end of period. Data from company SEC filings. Table and calculations by author.
This incredible level of employee additions has been a combination of organic hiring and a novel acquisition process. Over the years, MercadoLibre has partnered with smaller software shops on projects that play to that company's strengths. If MercadoLibre had a good experience after becoming more familiar with its staff and capabilities, it would go ahead and make the partnership permanent. Since 2012, it has acquired eight software companies this way and added expertise in mobile apps, machine learning, and fintech (just to name a few areas), along with 957 information technology professionals.
This may leave investors wondering why an e-commerce specialist is spending so much on software and infrastructure. But as you dig under the covers, the reasons become obvious.
It's a software company in disguise
MercadoLibre's broad ecosystem of services was created by software, and that software is enabling it to serve more customers in more ways. Let's look at its fulfillment network, Mercado Envios, as one example. In its early days, the company provided an eBay-like service that connected buyers and sellers. Shipping the product was up to individual sellers without the company's involvement and is represented by the "Drop Shipping" flow in the picture below.
Image source: MercadoLibre.
Over time, it has added drop-off points, cross-docking nodes, and warehousing services to reduce fulfillment costs and improve the reliability and speed of delivery. These additional capabilities require a robust and scalable inventory tracking system (all powered by software). But it's not just new services that its software team enables. It could be meeting new regulatory standards, improving performance, enhancing the user experience, or making its services more reliable.
With the IT costs approaching 10% of revenue, it may seem like the company is overspending, but that's really not the case. Its larger competitor, Amazon, spent a staggering $35.9 billion, or 12.5% of its revenue, last year on technology and content to support its global fulfillment business and its cloud services. Investors should look at these costs as moat-fortifying investments and a key to unlocking a huge new untapped market.
Image source: Getty Images.
The incredible potential of a large and underserved market
MercadoLibre is chasing an enormous opportunity built on its payments business, Mercado Pago. Looking again to its 10-K, leadership shared an ambitious vision for this platform:
We envision Mercado Pago as a powerful disruptive provider of end-to-end financial technology solutions that will generate financial inclusion to segments of the population that have been historically underserved and operate in the informal economy today.
This isn't just flowery prose; it's backed up by the company's most recent acquisition. Earlier this year, it acquired 19-year-old Lagash, a large established software company in the region with a specialization in "software for the banking industry, insurance-related products, as well as fintech solutions." Even though the purchase price wasn't disclosed, its 350 employees working in five different Latin American countries across the region give you an idea of the impressive size and scope of this acquisition.
With a significant portion of Latin Americans without a bank account or debit card, this acquisition will accelerate the Mercado Pago offerings and move the company ever closer to its goal of providing an "end-to-end" fintech solution for this underserved population.
Why MercadoLibre deserves a closer look
MercadoLibre's management sees its software team as one of its "key competitive advantages" and won't be slowing the growth of its information technology team anytime soon. This software-heavy investment approach has paid off, helping to catapult it into being the region's leading e-commerce and payments player. But with fewer than 5% of the region's 2019 purchases made online, a massive opportunity in fintech, and its software technology prowess, the best may be yet to come.
