We came across a bullish thesis on MercadoLibre, Inc. (MELI) on Rijnberk InvestInsights’ Substack by Daan Rijnberk. In this article, we will summarize the bulls’ thesis on MELI. MercadoLibre, Inc. (MELI)'s share was trading at $1872.01 as of Nov 8th. MELI’s trailing and forward P/E were 66.42 and 41.84 respectively according to Yahoo Finance.
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MercadoLibre stands out as Latin America's dominant force in both e-commerce and FinTech, with a unique advantage in a region still early in its digital transformation. With a $107 billion market cap, it is the largest business in Latin America and one of the world's 100 most valuable brands, solidifying its prominence in a high-growth environment. Operating across 18 countries—primarily Argentina, Brazil, and Mexico—the company has cultivated a stronghold in the online commerce ecosystem since its founding in 1999 by Marcos Galperin. By effectively leveraging its early entry, superior strategy, and the rise of e-commerce, MercadoLibre has built a significant lead, with a market share of around 21-22%. With e-commerce adoption low in Latin America—at just 10% versus 25% in the U.S.—there is substantial room for expansion. This favorable trend is expected to drive the industry at a 22% CAGR over the coming years, doubling the growth rate of North America.
MercadoLibre's FinTech segment, Mercado Pago, adds another layer to its competitive edge. As one of Latin America's most popular digital payment platforms, Mercado Pago offers extensive financial services including mobile point-of-sale systems, QR payments, and digital wallets. With over 56 million users—double that of two years ago—the platform has achieved leading positions in Mexico, Chile, and Argentina, and holds the #2 spot in Brazil. Given that cash transactions still dominate in Latin America, this sector is primed for growth. According to McKinsey, Latin America’s financial landscape is predominantly cash-based, presenting an opportunity for Mercado Pago to tap into a massive unbanked and underserved market. The shift to digital payments is forecasted to grow at 10-15% annually, positioning Mercado Pago to benefit significantly from this accelerating adoption.
MercadoLibre’s remarkable performance reflects both its advantageous positioning and exceptional execution by management. The company has grown revenues at a CAGR of 41% over the past decade and 26% in the last five years, indicating sustained demand. Even as it scales, MercadoLibre continues to expand its profit margins, aided by growth in its advertising business and its proprietary fulfillment network. This infrastructure has created a durable moat, enabling MercadoLibre to increase efficiencies and drive profitability. In recent years, the company’s net income margin improved from 1.2% in 2021 to 6.8% in 2023, and further gains are anticipated as cost efficiencies continue to accrue. Notably, with a 34% return on equity (ROE) and a 24% return on invested capital (ROIC), MercadoLibre exemplifies strong financial metrics in an emerging market context, highlighting its exceptional growth potential.
However, recent financial results caused a stir among investors. MercadoLibre’s Q3 report showed strong top-line growth, with revenues rising 35% year-over-year to $5.3 billion. This figure marked a deceleration from previous quarters, due largely to FX headwinds in key markets such as Argentina, Brazil, and Mexico, where local currencies have weakened against the dollar. When adjusted for FX, the company's revenue growth reached an impressive 103%, though this was somewhat skewed by Argentina’s extreme inflation. Growth in Brazil and Mexico remained robust, with FX-neutral revenues increasing by 60% in each market. While the currency fluctuations presented challenges, MercadoLibre’s revenue in these countries continues to reflect healthy demand and expansion potential.
Both of MercadoLibre's main segments—commerce and FinTech—saw solid growth, with commerce revenue increasing by 48% and FinTech by 21% year-over-year, despite currency obstacles. Within e-commerce, gross merchandise volume (GMV) grew 14% in dollar terms. Adjusted for currency fluctuations, GMV growth remained relatively steady across regions. Importantly, the total items sold increased 28% year-over-year, indicating stable demand. The company also achieved a milestone, setting a record in Q3 for total items sold, underscoring the resilience of its e-commerce business. MercadoLibre’s platform continues to gain traction, with 7 million new buyers added last quarter, pushing unique buyer numbers to an all-time high of 61 million.
The market reacted strongly to a Q3 profit miss, partly attributed to heavy investments in technology and logistics, including the development of 11 new fulfillment centers. These were not unexpected costs, as management had previously signaled its intent to bolster its fulfillment capabilities. Nevertheless, the miss prompted a significant sell-off, with shares declining over 17% as investors recalibrated their expectations. For long-term investors, however, this presents a potential buying opportunity, as the foundational growth story remains intact. Despite short-term volatility, MercadoLibre’s strategic investments are likely to yield long-term benefits by enhancing scalability and cementing its market leadership in Latin America.
In summary, MercadoLibre is exceptionally well-positioned to capitalize on secular growth drivers in both e-commerce and digital payments in Latin America, a region where digital penetration remains low but is advancing rapidly. With robust growth metrics, operational resilience, and expanding profit margins, MercadoLibre represents a compelling emerging markets investment with significant upside potential. This level of execution and market share expansion suggests the company could eventually become a trillion-dollar business, making it a potential multi-bagger over the next decade. For investors, the recent price dip offers an attractive entry point into a fundamentally strong business on a clear growth trajectory.
MercadoLibre, Inc. (MELI) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 84 hedge fund portfolios held MELI at the end of the second quarter which was 79 in the previous quarter. While we acknowledge the risk and potential of MELI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MELI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
