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From the Small- and Mid-Cap Survey: MercadoLibre, Inc.
MercadoLibre, Inc. was formed in Argentina in 1999; it commenced operations in that country in August of that year and was incorporated in Delaware that October. It received early backing from entities controlled by J.P. MorganChase (JPM - Free J.P. MorganChase Stock Report); Hicks, Muse, Tate & Furst; Goldman Sachs (GS); and Banco Santander (SAN). In September 2001, MercadoLibre formed an alliance with eBay (EBAY), which bought stock in the company, to serve the Latin American online commerce community. The alliance ended in 2006, and with it eBay’s agreement not to compete with MercadoLibre, but eBay remains a stockholder, with an 18% stake in MELI. The company went public in 2007.
MercadoLibre operates the largest online commercial platform in Latin America, offering buyers and sellers an Internet marketplace (MercadoLibre Marketplace), a payments system (MercadoPago), an advertising website (MercadoClics), and a virtual online store site (MercadoShops). The company’s services are currently available in 12 Latin American countries – Argentina, Brazil, Mexico, Uruguay, Colombia, Venezuela, Chile, Ecuador, Peru, Costa Rica, the Dominican Repuiblic, Panama-- and Portugal. In the second quarter of 2012, Brazil contributed 43% of operating profits, followed by Argentina (24%), Venezuela (20%), Mexico (6%), and other countries (5%).
Through MercadoLibre Marketplace, buyers and sellers can complete e-commerce transactions for a wide range of goods and services in either a fixed-price or an auction format. Larger items that can be traded on the site’s classified section include motor vehicles, vessels, aircraft, and real estate. Last year, users could view an average of about 11 million items a day, organized by country, in over 2,000 product categories. At yearend, the company had about 65 million confirmed registered users, up around 25% from the end of 2010; about 53 million items were sold through the site in 2011.
Through MercadoPago, users can pay for transactions on both MercadoLibre Marketplace and other websites. In 2011, customers used MercadoPago for about 27% of the company’s gross merchandise value. Like eBay’s Paypal division, MercadoPago offers users ease of use, safety, and efficiency, and it permits payments by customers who are not registered at MercadoLibre Marketplace. MercadoClics, launched in 2009, lets users promote their products and services through display and text advertisements on a cost per click basis. MercadoShops, started in 2010, allows customers to set up their own basic online stores free of charge and earns subscription fees for added services.
MercadoLibre’s growth has been very rapid, with revenues and earnings per share soaring from $85 million and $0.22 in 2008 to $299 million and $1.73 in 2011. In the June 2012 period, revenues and EPS jumped 28% and 68%, respectively, though the bottom line was helped by a lower tax rate than during the prior-year quarter. And this impressive performance was in the face of a stronger U.S. dollar: net income increased 90% at constant currency exchange rates. We look for 2012 earnings of around $2.20 a share as MercadoLibre continues to benefit from rapidly rising transaction and payments volumes.
Casting a possible shadow over MercadoLibre’s bright prospects, Amazon.com (AMZN) recently announced plans to expand into its territory. That could possibly dampen growth and erode margins. But we believe MercadoLibre’s positions as a market place and a payments method are well-enough established to maintain its e-commerce lead. Still, if Amazon persists and chooses to make a serious effort in Latin America, MELI could suffer.
MercadoLibre has a good reputation and solid prospects for rapidly rising earnings for the foreseeable future as e-commerce grows in Latin America. The question, as with all such shooting stars, is one of valuation: are the shares, currently trading at around 38 times our 2012 earnings forecast, overvalued at the recent price? For a comparison, eBay is selling for around 22.5 times expected 2012 earnings. With the stock just 15% below its recent all-time high, and up around 26% from its 2012 low, we think that most investors should wait for a better entry point for this high-flying issue. The economic malaise currently hitting Europe could spread to Latin America later this year. Adventurous, long-term investors who think that Argentina and Venezuela will mend their ways, though, might want to take a position now.
At the time of this article’s writing, the author owned shares of J.P. MorganChase.