Over the past year, much ink has been spilled about how tough comps and macroeconomic conditions are cratering growth of e-commerce, as well as weighing on the results of many fintech companies. While those reports are accurate, not all providers of such services are created equal. Take, for instance, MercadoLibre (MELI -1.79%). The company delivered a near picture-perfect financial report this week that flew under the radar of many investors -- which could be a costly mistake.
For the third quarter, MercadoLibre generated record net revenue of $2.7 billion, up 61% year over year in constant currency (more on that later). Operating margin expanded by 500 basis points to 11%, helping generate record quarterly operating income of $296 million. This resulted in earnings per share (EPS) of $2.57, up 34%.
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For context, analysts' consensus estimates were calling for revenue of $2.7 billion and EPS $2.41, so while revenue growth was in line with expectations, profits were much better than anticipated.
The results were driven by e-commerce revenue of $1.47 billion, up 33%, and fintech revenue that soared 115%. This marks the third successive quarter of triple-digit growth for MercadoLibre's fintech business.
Its e-commerce platform generated gross merchandise volume (GMV) or product sales of $8.6 billion, up 32% year over year, driven by higher conversion rates. At the same time, total payment volume (TPV) of $32.2 billion surged 76%. Perhaps most impressively, off-platform TPV -- generated by other websites and brick-and-mortar stores -- grew 122%, notching triple-digit gains for the fourth consecutive quarter, faster than its on-platform business.
MercadoLibre's active users grew to 88.3 million, up 12% year over year, while unique buyers on its platform climbed 10%. The company's fintech segment continues to thrive, with users growing 32% year over year, while digital wallet and investment account users grew 34% and 29%, respectively.
A word on "constant currency"
Investors have been hearing quite a bit about "constant currency" and similar phrases like "foreign-exchange neutral," so it's worth pausing for a moment to provide some insight. The U.S. dollar has been on a roll lately, gaining strength against most other currencies.
Why does this matter to investors? When companies deliver financial results, they must translate foreign currencies into dollars for the report. When the dollar is stronger, foreign currencies translate into fewer dollars, skewing the results downward. However, since MercadoLibre does all its business in the Latin American countries where it operates, this foreign currency translation only happens on paper -- it has no impact on its operations.
What that means to MercadoLibre investors is that the results you see in constant currency strip away the impact of the strong dollar, revealing the true underlying growth.
Plenty of growth drivers ahead
As impressive as MercadoLibre's growth has been, there's a much greater opportunity ahead. Internet penetration in the region still lags much of the world, as roughly 70% of the population has internet access, compared to about 92% in the U.S. As more people come online, MercadoLibre's market grows.
Also, it's estimated that e-commerce represented less than 5% of total retail in Latin America last year, compared to roughly 14% in the U.S. Online sales will continue to take share, expanding the transaction pool -- and MercadoLibre's opportunity.
In terms of potential customers, the market is greater, with a much larger population base in Latin America of about 625 million, compared to about 332 million in the U.S. More people means more potential customers for MercadoLibre's services.
Finally, Latin America is still a largely cash-based society, with roughly 58% of all point-of-sale transactions paid for with cash. MercadoLibre is a leading provider of fintech solutions in the region, so as more people adopt digital solutions, the company's opportunity increases.
MercadoLibre's consistent high growth and stellar execution make it a strong buy -- but it's not for everyone. The stock has historically been volatile and is currently down 45% from its high reached late last year. Yet even after that drubbing, it isn't cheap in terms of traditional valuation metrics, trading for 3.6 times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2. However, given the company's above average growth rate, I would argue it's deserving of the premium.
