Let's be honest: Last year was a tough one to be in the e-commerce business. A trifecta of tough comps, high inflation, and rising interest rates created a perfect storm of slowing growth and lukewarm demand for nearly every digital retailer -- and their stocks.
Two of the most popular examples help provide context. Net sales for Amazon increased just 9% year over year, but back out the results of Amazon Web Services -- its cloud computing business -- and revenue climbed an even more tepid 6%. At the same time, e-commerce platform and services provider Shopify fared slightly better, with revenue that rose 21%.
Yet, what if I told you that a little-followed digital retailer grew its revenue by 49% last year -- and was profitable to boot? Plus, what if you learned that this company followed up that performance with an equally impressive start to 2023?
Read on to find out how this business put up strong growth even as the competition faltered.
An impressive outlier in retail
If you haven't guessed by now, the company in question is MercadoLibre (MELI -1.90%), the leading digital retailer in Latin America. For the first quarter, the company generated revenue of $3 billion, up 58% year over year when adjusting for fluctuations in foreign currency exchange rates. Operating margin expanded a massive 500 basis points to 11.2%, helping generate operating income of $340 million. This resulted in earnings per share (EPS) of $4.01, up more than 200%.
For context, analysts' consensus estimates were calling for revenue of $2.9 billion and EPS of $2.79, so MercadoLibre left expectations in the dust.
The results were driven by commerce revenue of $1.7 billion, up 54%, and fintech revenue of $1.3 billion, up 64%. MercadoLibre's e-commerce platform generated gross merchandise volume (GMV) -- or product sales -- of $9.4 billion, equaling a 43% year-over-year increase. The GMV growth was driven by higher conversion rates. Even more impressive was total payment volume (TPV) of $37 billion, surging 96%. To top it all off, off-platform TPV -- generated by payments processed for other websites and brick-and-mortar stores -- soared 121%, notching triple-digits gains for the sixth consecutive quarter.
MercadoLibre's ecosystem crossed an important benchmark, surpassing 100 million unique active users for the first time, up 25% year over year. This was driven by buyers that increased 16.5% and fintech users that rose 24%. At the same time, digital wallet and investment account users grew 20% and 32%, respectively.
A massive opportunity remains
It's hard to overstate the fact that as impressive as MercadoLibre's growth is, the company is still facing a largely untapped market. Internet penetration in Latin America is still playing catch-up with much of the developed world, as roughly 69% of the population has internet access, compared to 93% in the U.S. As more of the population joins the internet revolution, MercadoLibre's pool of potential customers grows.
Also, it's estimated that e-commerce represented roughly 11% of total retail in Latin American last year, compared to roughly 15% in the U.S. Digital retail will continue to increase in popularity, expanding MercadoLibre's opportunity.
It's worth noting that the region has a greater pool of potential customers, as Latin America has a population of about 650 million, compared to roughly 332 million in the U.S.
There's also a massive opportunity in the payments space. Cash is still the leading payment method in Latin America, accounting for 36% of point-of-sale transactions in what is still a largely cash-based society. MercadoLibre's fintech solutions are gaining traction, and as more consumers adopt digital payment methods, more will turn to the company's popular local solution.
There is the small matter of valuation to consider, and frankly, MercadoLibre isn't going to appeal to everyone. The stock is currently 35% off its peak, even as the business continues to grow at a respectable clip. What's more, it's currently selling for 6 times sales; most experts agree a reasonable price-to-sales ratio is between 1 and 2. That said, the stock is near its cheapest valuation since the Great Recession in 2009 and given MercadoLibre's consistent execution and above-average growth, I would argue that the premium it sports is well deserved. When the stock eventually catches up with the business fundamentals, MercadoLibre investors will be richly rewarded.