Latin American e-commerce and fintech company MercadoLibre (MELI 2.31%) has been a massive winner for investors. A $10,000 investment in MercadoLibre when it came public in 2007 would be worth $506,000 now. That same investment into an S&P 500 index fund would only be worth $42,000 today.
This huge outperformance has been due in part to the rapid revenue growth that MercadoLibre has experienced as it has expanded its offerings over time. However, the last few years have seen MercadoLibre's pace of revenue growth start to slow. Should this worry investors? Does this make the stock less attractive?
Let's dig a little deeper to get the full picture of the strength and potential of the business.
MercadoLibre's business
Before exploring MercadoLibre's performance it may be helpful to briefly review the different parts of the business. The largest and most established parts are the MercadoLibre e-commerce marketplace and the MercadoPago fintech platform. The company also has logistics, advertisement, classifieds, and online storefront businesses.
These six services report revenue in two segments called commerce and fintech. As of the most recently reported period, the second quarter of 2023, commerce and fintech represented 57% and 43% of overall revenue, respectively. MercadoLibre operates in 18 countries but the majority of its revenue comes from Brazil (52%), Argentina (23%), and Mexico (21%).
Revenue growth is slowing
Revenue grew 32% year over year in the most recent quarter. That's pretty strong growth and nothing to spark concern. However, context is key. In the year-ago quarter, revenue grew 52%. In the second quarter before that, it was 94%.
Seeing revenue growth go from 94% to 32% in just two years could be a concern, but it's important to remember that MercadoLibre had the same spike in business that many other e-commerce and fintech businesses did during the pandemic. Investors are still watching to see where this slowing growth levels off and begins to accelerate again.
Marketplace growth drivers
While there has been some deceleration in year-over-year revenue growth, key metrics for the e-commerce marketplace are heading in the right direction. In Q2, MercadoLibre's gross merchandise volume (GMV) grew 23% year over year. Items sold and items shipped grew by 17% and 20%, respectively.
Importantly, all three of these metrics grew at a higher rate than they did in Q2 2022. Total unique buyers increased by 17%, with Brazil and Mexico growing the fastest. These metrics tell investors the marketplace is firing on all cylinders.
Fintech growth drivers
On the fintech side of the business, the story is similar. Total payment volume (TPV) grew by 39% while total payment transactions increased by 69%. Year-over-year growth for both of these metrics has been slowing, contributing to some of the top-line deceleration, but these are still very strong results.
The Mercado Pago business is also seeing unique users and users of its digital wallet increase. Unique users were up 19% year over year, while wallet payers grew by 22%. Unique users is an important indicator of the platform's adoption.
The bottom line for investors
In my view, the slowing revenue growth is nothing to be concerned about now. If it was accompanied by margin compression or decreased profitability, that would be a different story. But the reality is that gross margin, operating margin, and net income margin all increased year over year. If any of these metrics or the key commerce and fintech growth drivers start to show signs of weakness, investors should take a second look.
As it stands now, MercadoLibre looks to be an increasingly strong business in an emerging geographic market with lots of growth ahead. The stock is not cheap, but with shares still trading 30% off their late-2021 high, it looks compelling for long-term investors.
