Deconstructing MercadoLibre's Business Model

Investors probably recognize MercadoLibre (MELI -0.45%) as the leading e-commerce business in Latin America. But this growing company is so much more. It's building an entire ecosystem supporting its online marketplace and those businesses are becoming leading services on their own. On a Fool Live episode recorded on March 12, Fool.com contributors Brian Stoffel and Brian Withers dive into the components of this Latin American gem to explain all the pieces that investors may be missing.

Brian Withers: You want to talk about MercadoLibre's business model?

Brian Stoffel: Yes. I'll kick it off and we'll talk about MercadoLibre's business model. They've got a couple of different things. I think it's worth just telling their story. They started out as an online marketplace similar to what eBay is today. In fact, eBay was one of the early investors. The marketplace is still the key, and so they color code their results here. They haven't put one out for the fourth quarter, which is annoying. But that's OK. We can just use this one for the third quarter and it will still tell the story.

They basically, by Marketplace, what that means is it just like Amazon. You can go, you can look for something. Amazon itself does not provide the majority of the goods on Amazon anymore. They just facilitate it. In other words, they have the website and that website is gold because everybody goes there and everybody list there and they get to collect money because that's the place where everybody goes. That's what MercadoLibre has, too. They don't actually own much of the inventory that they ship to people. They just facilitate it. They make it easier for it to happen. As you can see, there's three key countries that they're in: Argentina, Brazil, and Mexico. These are foreign currency-neutral growth rates during the third quarter of last year. As you can see, it's growing like bonkers, just crazy fast. Some of that has to do with the fact that currencies can be quite volatile. But the bottom line is that it grows very quickly.

But that's just the first part because then we get to the other part, that's part of the e-commerce, which is Mercado Envios which is logistics. This is a big deal because this is something that says eBay didn't really get into of owning huge fulfillment centers and creating systems to help people ship things across the country. eBay, more or less relied upon UPS, FedEx, and the U.S. Postal Service to do this work in the United States. What MercadoLibre did was they took a page out of Amazon's book and they said, forget that. We're going to own the logistics process. It's a big deal. Because if you look here, you see that over 90% of the things that are shipped, that are bought on the marketplace are shipped using Mercado Envios. That's a lot of money to pay upfront. But as we get into later, it creates a powerful moat in terms of low-cost production.

What I mean by that is that for MercadoLibre to ship something from point A to point B within Latin America, their internal costs for doing that is going to be lower than an upstart who has to use the local postal services, who has to use MercadoLibre's Mercado Envios, or who tries to build out their own because this is expensive. It's really expensive to do.

Then the other one that they still report on, and there are others that I will talk about in a second is Mercado Pago. This is the Amazon Web Services for MercadoLibre. What I mean by that is, this is the thing that wasn't in the original business plan right when it was hatched that has just exploded. Originally, this was a way to get people to pay for things on the marketplace. In other words, there are a ton of people in Latin America who are unbanked or under-banked. In other words, they don't really have a way to pay for things before this came along to buy them online.

Because normally you pay for things with cash and you can't put your cash into a computer no matter how hard you try, doesn't work. They created a way to do that with Mercado Pago, much like Venmo or PayPal. What they've seen is that it was meant to grease the wheels of the first section up here so people could buy things. But what's happened over time is that more and more and more, it's being used to pay for things not on the marketplace.

What do I mean by that? I live in Latin America for part of the year and I go to the corner store for stuff almost every day and usually I pay with cash. But if Mercado Pago was popular in Costa Rica, which is where I go, I could use that to pay for my groceries, my gas, things like that because they have mobile point-of-sale devices everywhere, and those point-of-sale devices, that's what you put your credit card into or which you swipe your credit card through. They have developed a way to pay for things that are off their platform and that is just massive.

One other thing I just wanted to show to give you an idea of where this growth comes from. It's not just these things. It's also things like Mercado Credito. They didn't break that out in this quarter, but it's credit. They have Meli Air. They just launched in the fourth quarter of last year, which is part of Mercado Envios. Envios mean shipping, where they have a fleet [of airplanes] or that they're building out to ship things via air. They're taking the page right out of Amazon's playbook. Brian, can you tell me, can you see this chart right here?

Withers: Yes.

Stoffel: Basically, this blue part right here is their sales in e-commerce and that's in millions of dollars. Then the red is what they collected via Mercado Pago. Basically, things like Mercado Envios, building websites, their advertising that they sell in the marketplace itself. That's all the blue. Mercado Pago, Mercado Credito, things like that, that's in the red. Bottom line their e-commerce is growing, but the revenue is growing by 75% per year over the last three years. Their fintech is growing by 53%, both impressive.

The big three are the Marketplace, Mercado Pago, Mercado Envios, but there's so many more that they are putting in there. There's just a whole lot of other ways that they are continually finding new solutions to fulfill their mission, which is to democratize commerce and finance in Latin America. That's their business model.