MercadoLibre (MELI 1.85%), the largest e-commerce company in Latin America, nearly tripled its market capitalization in 2020 as its growth accelerated throughout the pandemic. But over the past 12 months, the high-flying stock lost nearly a third of its value as investors fretted over its decelerating growth and declining margins in a post-lockdown market.
Does that pullback represent a good buying opportunity for investors who missed out on MercadoLibre's multibagger gains over the past two decades? Let's compare the bear and bull cases to decide.
Image source: Getty Images.
What the bears will tell you
The bears believe that challenging year-over-year comparisons, rising expenses, aggressive competitors, and macroeconomic headwinds will limit MercadoLibre's gains this year.
MercadoLibre's year-over-year growth in gross merchandise volume (GMV), total payment volume (TPV), unique active users, and total revenue all decelerated significantly over the past two quarters:
|
Growth (YOY) |
Q3 2020 |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
|---|---|---|---|---|---|
|
GMV |
117% |
110% |
114% |
46% |
30% |
|
TPV |
161% |
134% |
129% |
72% |
59% |
|
Unique Active Users |
92% |
71% |
62% |
47% |
3% |
|
Revenue |
148% |
149% |
158% |
103% |
73% |
Source: MercadoLibre. Constant currency terms. YOY = Year-over-year.
That slowdown also occurred across all three of its largest markets: Brazil, Argentina, and Mexico.
MercadoLibre's gross and operating margins also declined sequentially in the third quarter. Rising interest rates in Brazil squeezed its gross margins, while higher costs related to the expansion of its first-party marketplace and logistics network reduced its operating margins.
As MercadoLibre's growth decelerates and its margins decline, more competitors are entering Latin America. MercadoLibre has fended off big challengers like Amazon before, but Sea Limited's (SE 4.54%) Shopee -- the Southeast Asian leader that entered Latin America in late 2019 -- has been a resilient challenger. Last August, Shopee overtook MercadoLibre as the region's top e-commerce app in terms of monthly active users (MAUs), according to Apptopia.
Other smaller competitors -- including Facily, Sou Barato, and Alibaba's AliExpress -- are growing even faster than Shopee in Latin America. This shifting competitive landscape raises troubling questions about MercadoLibre's ability to maintain its first-mover's advantage.
Macroeconomic headwinds also pose near-term challenges. Inflation across Latin America could impact its sales of discretionary goods while reducing the reported value of its sales in U.S. dollars. Higher interest rates, which will naturally kick in to tame inflation, will make it tougher for the company to fund its long-term expansion plans with fresh debt, while simultaneously reducing the market's appetite for higher-growth tech stocks.
Lastly, MercadoLibre spooked the bulls with a secondary offering of a million shares of its common stock at $1,550 apiece last November. That $1.55 billion equity raise will enable the company to fund its expansion plans without increasing its debt, but it also increased its outstanding share count by about 2%, and indicated its stock price had hit a near-term peak.
What the bulls will tell you
The bulls will point out that MercadoLibre's growth remains broadly stable on a two-year basis, which evens out the pandemic-induced gains.
On a two-year basis, its GMV rose at a compound annual growth rate (CAGR) of 73% on a constant currency basis in the third quarter, compared to a CAGR of 74% in both the first and second quarters of the year.
During MercadoLibre's latest conference call, CFO Pedro Arnt said its e-commerce marketplace experienced "higher levels of engagement with increasing transactions per unique buyer sequentially," gained more buyers "compared to the periods before the pandemic," and achieved "better retention levels" for all of its buyers. Those upbeat comments indicated it wasn't too worried about the competition.
The bulls will also claim there's plenty of room for MercadoLibre, Sea, Amazon, and Alibaba to expand in Latin America without trampling each other. Morgan Stanley expects the region's e-commerce penetration to rise from just 9% in 2021 to 16% in 2025, then gradually climb to 50% over the next several decades. As the first mover in this growing market, MercadoLibre's scale, mature logistics network, and Mercado Pago payments platform still give it significant advantages against its challengers.
Lastly, the bulls will tell you that MercadoLibre's stock is cheap relative to its sales growth. Analysts expect its revenue to rise 75% in 2021, 35% in 2022, and another 35% in 2023. Based on those forecasts, MercadoLibre trades at just six times next year's sales. Sea, which is growing at a faster (but less stable) rate than MercadoLibre, trades at eight times next year's sales.
MercadoLibre is still a good long-term investment
MercadoLibre faces a lot of near-term challenges, but it remains the most well balanced way to profit from the long-term growth of Latin America's e-commerce and fintech markets. Its core business is still healthy, its expansion plans are sound, and its valuations are attractive.
Simply put, investors should accumulate some shares of MercadoLibre at these discounted prices before its valuations start heating up again.
