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Is MercadoLibre Running Out of Room to Grow in Latin America?

By Brian Withers, Brian Stoffel, and Toby Bordelon – Updated Jun 23, 2021 at 7:54AM

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Should it look to expand beyond its home region?

MercadoLibre (MELI) has operated in Latin America since 1999. It does business in 18 countries in the region and hasn't stepped outside of that footprint. As e-commerce competition ramps up, investors are wondering if that's enough ground for this e-commerce and payments processor to continue to grow.

On a Fool Live episode recorded on May 12, Fool contributors Toby Bordelon, Brian Stoffel, and Brian Withers discuss the company's recent results and whether it makes sense for this Latin American operator to expand beyond the region where it was born.

Brian Stoffel: All right, next stock up. My number two holding by percentage of my portfolio is MercadoLibre, ticker symbol, MELI. Now, I would like to think that there's three relevant parts of this company right now, today. There's going to be more in the future. Number one, its legacy is that it has a marketplace to buy and sell things in Latin America. For the overall company, total revenue was up 52 percent while free cash flow losses widened, almost tripled, but that's just for the first quarter, and on a run rate, the company has shown that it can be free cash flow positive.

But let's talk about those three segments. First one, the marketplace, gross merchandise volume or the value of all the stuff that people bought and sold on the platform was up 77 percent and in local currencies, it was actually more than doubled. The unique active users who were coming to that site was up 62 percent to about 70 million people. Very strong.

Mercado Envios, Envios means "to send", is their fulfillment business, which basically means much like Amazon these days, very little things that are sold on amazon these days are actually Amazon products. There are other companies that are using Amazon's website and then they use Fulfillment by Amazon. Well, MercadoLibre spent a long time making investments in fulfillment and the number of packages shipped with Mercado Envios also more than doubled. It was up 130 percent.

Finally, the huge growth driver over the past couple of years is Mercado Pago, which is a way to pay for things digitally in Latin America. The total payment volume, in other words, all the money that went from point A to point B on Mercado Pago up 82 percent to $14.7 billion in just one quarter. That also more than doubled in local currencies. But here's the real interesting thing. Off platform, which means, say I'm in Costa Rica, even though Mercado Pago's not in Costa Rica. Say I'm in Costa Rica and I pay for my groceries using Mercado Pago, that's off-platform. I'm not buying anything from MercadoLibre, but the amount of stuff trading hands, up 83 percent and actually more than doubled in local currencies and about the same growth for things paid for on MercadoLibre's website. All-in-all, I'd say again, a very strong quarter.

Toby Bordelon: Very good. Yeah. We did a deep dive not too long ago on this, a few weeks ago, I think, on MercadoLibre and one thing that came up there when looking at the competitors, you got a lot of these big e-commerce companies that are dominant in their region. For MercadoLibre, that's obviously Latin America, but they're starting to come and try to play in each other's sandboxes now as they start to push into different areas. The question I have is, what do you think is more likely? Do you think MercadoLibre can successfully expand outside of its core Latin American market before another major player becomes a serious threat to them inside Latin America?

Brian Stoffel: I don't want them to expand outside of Latin America, I don't. Their mission is to democratize commerce in Latin America, but here's the reason why, and it's something that I think people miss all the time. We're so tech-focused, and for good reason. Running an e-commerce platform is about bricks, and mortar, and the tires on the ground, and the human beings that walk from the delivery van to the front door. This is not stuff that scales easily. This is super expensive to do.

Go look at what Jumia is trying to do in Africa and how, truth be told, in my opinion, they are failing miserably because they're trying to do stuff that doesn't scale very well across the entire continent and they are trying to do it all at the same time and it just doesn't work. I think, if people want to come and try and play in their sandbox, good luck. Like Amazon has tried, not done very well. Walmart's tried, Sea Limited's trying now, I think that's a fool's errand (small "f"). What I would love to see is to slowly build out fulfillment capacity in other countries in Latin America because they're only in, I think six of them when it comes to fulfillment, so I'd like to see them in more.

But I am fine with them not expanding. In fact, I would be worried because, listen, e-commerce websites scale easily. Payment options scale easily. Fulfillment does not scale easily. So keep it inside of that continent, in my opinion.

Brian Withers: Yeah. Just a comment on that. MercadoLibre is doubling its workforce this year, this calendar year, and they are adding 16,000 people to their roster and 11,000 of them are part of the Envios fulfillment platform. I can't even imagine how many people you have to hire every single day to hire 11,000 fulfillment people. It's tremendous. They are far and away to me, the leader in the region and I want to see them continue to keep a lock on that.

Toby Bordelon: You think there is still plenty of room for growth within the region? 

Brian Withers: Huge.

Brian Stoffel: I lived down there for part of the year. There's so much room for growth.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Amazon, MercadoLibre, and Sea Limited. Brian Withers owns shares of MercadoLibre and Sea Limited. Toby Bordelon owns shares of Amazon, Jumia Technologies AG-ADR, and MercadoLibre and has the following options: short August 2021 $15 puts on Jumia Technologies AG-ADR and short June 2021 $60 calls on Jumia Technologies AG-ADR. The Motley Fool owns shares of and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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