MercadoLibre Inc – October 13, 2022

MercadoLibre has emerged as an e-commerce titan, essentially Latin America’s answer to Alibaba, and valued at over $40 billion as consumers across the region have turned to online shopping. The company whose name translates to “free market”, hosts the largest online commerce and payments ecosystem in the region. It enables e-commerce, digital, and mobile payments for its customers through a suite of technology solutions across the complete value chain of commerce.

The platform and related services provide users with tools that address the distinctive cultural and geographic challenges of operating in Latin America, a region with a population of over 650 million people and one of the fastest-growing internet penetration rates in the world.

Beyond its core MarketPlace platform for users to sell products, MercadoLibre offers a payment platform for online sales, advertising, tools for retailers to easily build their own e-commerce platforms, credit scoring, as well as a logistics business facilitating fast and seamless shipments across the different geographies.

The company is currently present in 18 countries including Argentina, Brazil, and Mexico, among others. Boasting almost 140 million users and based on unique visitors and page views, MercadoLibre is the market leader in each of the major countries in which it operates.

Yet Latin America is still in the early stages of the digital transformation of retail. As a result, the company continues to focus on growing its enormous footprint by further enhancing the platform’s ecosystem to better serve individuals, brands, retailers, and other businesses that want to buy or sell goods and services online.

MercadoLibre was founded in Argentina back in 1999, as an online consumer-to-consumer marketplace for pre-owned goods. While pursuing his MBA at Stanford, founder Marcos Galperin was inspired by the success of eBay in the U.S. and wanted to replicate the business model in Latin America. An original team worked in a small garage and launch the bidding-based site after just a couple of months.

The company experienced steep growth during its first years despite the catastrophic effect of the dot-com bubble burst on the technology industry, and by September 2001, eBay had purchased a 19.5% stake in the company.

Beyond the core markets of Brazil, Mexico, and Argentina, operations in Costa Rica, Panama, and the Dominican Republic were up and running by 2006. A year later, MercadoLibre became the first Latin American technology company to be listed on the NASDAQ.

Acquisitions soon included competitor DeRemate’s operations, along with Classified Media Group, which established the e-commerce portals tucarro.com and tuinmueble.com. Also added, were Portal Inmobiliario, a Chilean classified ad website, as well as Metroscúbicos.com, the portal of Mexico-based real estate company Grupo Expansión.

Today, MercadoLibre is the leading e-commerce and fintech platform in Latin America. Now with more than 11,000 employees, explosive growth in 2020 saw it become the biggest company in the region.

Founder Marcos Galperin has been the chairman, chief executive officer, and president of MercadoLibre since 1999, shaping and leading the company on its impressive journey from a garage to a continental juggernaut. Prior to MercadoLibre, Galperin’s career began in financial services with time in the fixed income department of J.P. Morgan Securities and at YPF S.A., an integrated oil company, where he managed YPF’s currency and oil derivatives program.

He is joined by long-serving chief operating officer and executive vice president, Daniel Rabinovich, who has been instrumental in the company’s product development as the company’s previous chief technology officer.

While Osvaldo Gimenez who has been the president of the company’s fintech business since 2020 is helping guide MercadoLibre through its next phase of growth with its foray into user-centric apps that have significantly challenged incumbent banks.

Over the years, MercadoLibre has expanded into several different solutions, following a mission to democratize commerce and advance financial inclusion. Its marketplace continues to be the core of the company providing a fully-automated, topically-arranged, and user-friendly online trading service, yet has evolved to include reviews, payments processing, financing, and shipping and fulfillment solutions. It offers buyers a deep assortment of items that are often more expensive or otherwise hard to find through traditional offline sellers. It has also shifted from bids of pre-owned goods to larger professional sellers offering new items, with fast shipping and free returns. New products now represent about 98% of the platform’s total listings.

Faced with a ubiquitous problem of disintermediation, where both sellers and buyers would seek to find creative ways to bypass the platform’s commissions and connect outside the site, the company largely addressed the issue by integrating their own payment processing and shipping service in the buyer’s journey.

The Mercado Envios service is a shipping solution for marketplace users providing economies of scale through integration with local carriers and state-of-the-art warehousing services underlying it, that drive down shipping costs and eliminate friction for buyers and sellers. Along with various shipping fulfillment options, MercadoLibre’s network of drop-off points provides sellers with an easier way to deliver their products.

While a comprehensive range of point of sale, merchant services, digital wallets, and prepaid card solutions allow merchants and individuals to do everything from process physical and digital payments, QR and P2P payments, pay utility bills, cell phone top-ups, and transportation tickets. Mercado Pago was initially designed to facilitate transactions on MercadoLibre’s Marketplaces by providing a mechanism that allowed users to send and receive payments easily, quickly, and securely. Now, it is a full ecosystem of financial technology solutions that enables any MercadoLibre registered user to send and receive digital payments and to pay for purchases made on any of MercadoLibre’s marketplaces.

Complementing with broader financial services, Mercado Fondo provides an asset-management feature that enables users to reap the benefits of investing in low-risk assets, while the Mercado Credito service gives users access to financing using MercadoLibre information about users for credit scoring purposes.

Beyond facilitating marketplace transactions, over the years MercadoLibre has expanded its array of services to third parties outside the core marketplace. It began first by satisfying the growing demand for online-based payment solutions by providing merchants the necessary digital payment infrastructure for e-commerce to flourish in Latin America, having observed that individuals and micro, small and medium-sized enterprises were being underserved or overlooked by incumbent payment providers and financial institutions in the region, and that a very large number of retail transactions were still being settled in cash.

Consequently, the company has aggressively deepened its fintech offerings by growing online-to-offline products and services that aim to draw potential customers from online channels to make purchases in physical stores. Despite this, the impact of the COVID-19 pandemic had a positive effect on the majority of online payment flows which benefited from the same tailwinds as its e-commerce business and more than offset the negative impact of the pandemic on its offline payment solutions, which suffered as a result of the lockdowns.

MercadoLibre’s main focus is to serve people in Latin America by enabling wider access to e-commerce services, thus contributing to the development of a large and growing digital economy in a region. As it strives to make inefficient markets more efficient through technology, its strategy is focused on expanding into additional transactional service offerings, continuing to improve the shopping experience for its users, and increasing the monetization of transactions. New offerings include growing off-platform in both digital and offline transactions, providing additional product categories in the core marketplace, further building its presence in vehicle, real estate and services classifieds, and delivering enterprise software solutions to online commerce business users.

Furthermore, the company believes there is considerable opportunity to take advantage of synergies that exist among its services. By leveraging its various businesses across Envios, Pago, and Marketplace, coupled with its Puntos loyalty program, it expects to promote greater cross-usage, thereby creating a fully integrated ecosystem of e-commerce offerings.

The second quarter of 2022 marked another period of records for MercadoLibre, with both revenues and EBIT among the KPIs that hit historical marks. Net revenues reached almost $2.6 billion, growing 53% year on year. Total Commerce revenues reached $1.4 billion, growing 23% due to the expansion of total gross merchandise volume along with the acceleration of growth in commerce revenues in Mexico. The company’s Fintech revenues also surpassed the billion-dollar mark for the first time ever and grew 113% year-over-year, as over 38 million unique active users maintained traction in all geographies, and as new features continue to be added.

Gross profit margins improved for the second consecutive quarter, reaching 49.4%, compared to 44.3% last year. Consistent results in the top-line generated scale for MercadoLibre’s cost base and diluting costs for shipping operations, payment processing fees, first-party product costs, customer service operations, and fraud prevention investments.

Operating expenses represented 39.8% of revenues in the quarter, up from 34.5% last year, but improved sequentially from 41.5%, as the company delivered efficiencies in marketing and sales expenses, extracting a higher return on investment for every dollar spent. The efforts delivered a net income of $123 million, up 4.0% from last year.

Looking ahead, consensus estimates appear confident MercadoLibre’s strong performance will continue in the near future as total sales for 2022 are expected to exceed $10 billion, representing almost 50% growth year-on-year. While earnings per share estimates for 2022 are forecasted to reach $7.90 per share, up an enormous 373% from $1.67 in 2021.

MercadoLibre’s management team has not provided specific forecasts, however, its strategy for expansions and improvements across the ecosystem is expected to help support the company’s continued strong growth.

As MercadoLibre continues to consolidate as the leading e-commerce and fintech platform in Latin America, it is also under constant threat from some of the biggest players in the industry. With a similar business model, Amazon is already competing with MercadoLibre in Mexico and Brazil. However, the company’s experience navigating the complexities of business and especially logistics in Latin America has helped it remain competitive.

Traditional banks are also fierce competitors to Mercado Pago. After losing their first-mover advantage, many of the biggest banks in the region have launched user-centric apps in an attempt to catch up by leveraging their many years of experience in the industry and their vast number of clients.

Surging from Amazon-like origins, the MercadoLibre marketplace has expanded to become a complete digital ecosystem for millions across Latin America. The rapid adoption of the company’s payment solutions beyond its marketplace continues to push sales to new records. With new products and services and room to achieve huge synergies across the business driving future growth, there appears to be little stopping this massive success story.