Initiation of Coverage: Mercado Libre (MELI)
Disclosure: Nothing contained within this article is financial advice, and is purely for educational and informational purposes.
Mercado Libre has quietly built up a dominant multifaceted e-commerce and digital payments empire across Latin America. Everyone is always looking for the next Amazon, and Amazon’s playbook is followed closely by many, so to see a company follow their playbook, and succeed in a different part of the world is very impressive. Mercado Libre has focused heavily on building out distribution centers across its largest markets, Brazil being the crown jewel. Mercado Pago is truly revolutionary on its own, specifically enabling people to pay both on and off-platform. No other company has truly implemented such technology. What first attracted me to Mercado Libre as an investment was the capital raising they completed back in March 2019. That $750 million raise came from financial giants like Visa and PayPal, companies that are ingrained in daily life of hundreds of millions, if not billions, of people. Eighteen countries may not sound like a lot since so many of Latin America’s residents are still behind their Western European and North American counterparts in per capita income, but this only gives support to the long-term view I hold, which is as follows:
For almost 20 years, Amazon made little to no profit at all. The public balked, confused as to how a company could be unprofitable for twenty years, but still remain in business, and growing rapidly. Amazon discovered that e-commerce as a business had very low margins, but, Amazon Web Services, their cloud computing business, changed the game. AWS is Amazon’s Golden Goose. As AWS goes, so goes Amazon, along with their revenues and profits. Amazon has long used its Amazon Web Services division to finance many of the new businesses they chose to enter. The one complimentary business that Amazon never got right, however, was payments. Although Amazon can accept credit and debit cards, they never control the entire transaction, since they don’t own the credit card companies or banks. Mercado Libre has much of the same offerings as Amazon, albeit in its earlier days.
They provide a Marketplace, where everyone is given a platform to sell products, utilizing their extensive logistics network (Mercado Envios) that spans a decent chunk of the South American continent, Mercado Libre has copied many of Amazon’s decisions. Owning your own logistics network in Latin America, where roads and transportation networks have remained in the pre-Industrial Age, Mercado Libre creates value for everyone by installing a delivery network, to begin with. People in the United States have had the Post Office to send packages around the country. Chile, Argentina, Ecuador, Colombia, and Brazil did not gain high-speed transportation like much of East Asia and parts of Europe. There is inter-generational value to be extracted from the logistics network, which also includes hundreds of drop-off & pickup locations for packages, much like Amazon’s Hub Locker network. Not only does the logistics division of the company produce a ton of added value for customers buying and selling products on the web, but, it also can be leased out to other third parties, where Mercado Libre would have pricing power, seeing as they’re the only ones with an extensive network covering the region.
Mercado Pago is the paradigm-changing payments platform that Mercado Libre has built to enable offline and online payments via cash, credit, or debit. When we talk about AWS for Amazon, we refer to that as one of their largest moats about their business, with few viable competitors. Mercado Pago is the moat, no other company has been able to match. Regardless of what other competitors might enter Latin America, Mercado Pago holds the key to the company’s future. Since much of Latin America’s economy is cash-based, Mercado Pago provides a way to harness the purchasing power of the average resident of the region. With digital wallets and digital P2P payments becoming the standard for global business in the last several years, Mercado Libre is poised to gain a tremendous advantage in processing payments and facilitating the movement of goods across the Western Hemisphere. Mercado Pago also encompasses a cryptocurrency wallet, enabling individual users to buy and sell a variety of cryptocurrencies. This is a relatively new part of their business, but is definitely one to watch for in the upcoming months as adoption of cryptocurrency grows across Latin America.
The remaining businesses under the umbrella of Mercado Libre include the following: Mercado Fondo, which provides brokerage services utilizing the deposits made into Mercado Pago accounts, Mercado Credito, which provides lending services to consumers and merchants, Mercado Libre Classifieds, an online classifieds listing services where users can list items for sale as well as purchase real estate, motor vehicles, and other services, Mercado Ads, an online advertising platform that provides brands and large retailers a method of promoting their product and service offerings on the internet, and lastly, Mercado Shops, which provides digital storefronts solutions that empower individual users to handle every aspect of starting up and running their own Web stores. As you can see, Mercado Libre has been inserting itself into every element of Latin American commercial life. With Mercado Pago changing the way people pay for goods and services, Mercado Libre is primed to continue disrupting the legacy banking system, as well as the overall e-commerce landscape in the region. With over 660 million people, Latin America provides an invaluable testing ground for all of Mercado Libre’s new offerings.
As a shareholder, myself, since May 2019, I have always held a long-term view that Mercado Libre will be the dominant player in e-commerce in one of the fastest growing regions in the world. Outside of the stock price more than doubling since I first invested, Mercado Libre has grown its revenue exponentially, quarter after quarter. I rate Mercado Libre (MELI) as a HOLD.
If you have any questions or would like to reach out and say hi, feel free to send any inquiries to Mercado Maestro