3 Things About MercadoLibre That Smart Investors Know

Most tech investors likely recognize MercadoLibre (MELI 1.55%) as the largest e-commerce company in Latin America. They might also know that it operates across 18 countries but generates most of its revenue from just three markets: Brazil, Mexico, and its home country, Argentina.

I dug deeper into MercadoLibre's fourth-quarter earnings report in late February, and concluded that its stable growth and historically low valuations still made it a compelling buy. But today, I'll examine three other aspects of the company that smart investors should also closely monitor.

Image source: Getty Images.

1. MercadoLibre still faces stiff competition

MercadoLibre is the e-commerce leader in Latin America, but it doesn't completely dominate the fragmented and growing market yet. It ranks first in terms of total monthly visits, according to Web Retailer, but still faces intense competition from Amazon (AMZN 0.82%), Lojas Americanas, Casas Bahia, and Sea Limited's (SE 4.80%) Shopee.

Data source: Web Retailer.

But that's not all. Last August, the mobile-app tracking website Apptopia found that Shopee had actually overtaken MercadoLibre as the region's most-downloaded shopping app. The firm also ranked the five fastest-growing shopping apps across Latin America, and found that other marketplaces like Facily, Sou Barato, and Alibaba's (BABA 2.84%) AliExpress were gaining users even faster than Shopee.

Data source: Apptopia.

MercadoLibre could beat back many of these smaller challengers with its superior scale and logistics capabilities. However, investors should still be wary of well-funded overseas competitors like Amazon, Sea, and Alibaba as they try to plant their flags in the growing Latin American market.

2. MercadoLibre is upgrading its logistics network

To fend off these aggressive challengers, MercadoLibre has been expanding its own managed logistics network to streamline its deliveries. Nearly 90% of its shipping volumes were processed by its own network in the fourth quarter of 2021, compared to just 77% in the fourth quarter of 2020.

In addition, MercadoLibre upgraded its fulfillment centers to handle heavier and bulkier items like consumer electronics and home appliances. In the fourth quarter of 2021, it delivered nearly 80% of its volume within 48 hours and almost 60% of its volume within the same or following day.

It also acquired a logistics company called Kangu last year, then rebranded its network of approximately 5,000 pickup and drop-off locations across Brazil, Mexico, Argentina, Chile, and Colombia as MELI Places. That expanding network of MELI Places should enable the company to serve even more buyers and sellers while further shortening its average delivery times.

During last quarter's conference call, chief financial officer Pedro Arnt said MercadoLibre's fulfillment upgrades enabled it to "deliver cost efficiencies throughout the peak shopping season compared to last year." Therefore, its ongoing logistics upgrades could widen its moat against its competitors across the region while enabling it to reduce its long-term costs.

3. Its fintech ecosystem is growing rapidly

MercadoLibre also has a first-mover advantage in Latin America's nascent fintech market. Its Mercado Pago payments platform, which is similar to PayPal Holdings, tethers merchants, customers, and even off-site businesses to its ecosystem.

MercadoLibre has been expanding that ecosystem with credit-based payment services (Mercado Crédito), online insurance policies, investment services, and even cryptocurrency purchases over the past few years.

It ended the fourth quarter of 2021 with 34.5 million unique active fintech users across all of its services, which represented 23% growth from a year earlier, as its total digital-account payment volume surged 138% (on a constant currency basis) to $7.1 billion. Its number of investment accounts also increased 50% year over year to 22.3 million.

Investors often gloss over MercadoLibre's fintech business because it doesn't generate as much revenue as its e-commerce business, but that would be a mistake. Latin America's embedded digital payments industry could still see a compound annual growth rate of 27.8% between 2022 and 2029, according to Research and Markets, and MercadoLibre should remain one of the best long-term bets on that booming market.

Plenty of room for growth

Analysts expect MercadoLibre's revenue to rise by more than 30% for at least the next two years. Its earnings growth could be bumpy as it ramps up its investments in its logistics and fintech businesses, but its stock trades at just five times this year's sales after its recent sell-off. That low valuation and its promising long-term growth potential make it one of the few high-growth stocks I'd still recommend buying in this tough market.