Tag Archives: e-commerce

Mercado Libre Q3 FY 2025: Credit Card and GMV Growth Driven by Shipping Scale

CFO Martín de Los Santos: “Investments across our ecosystem continue to deliver growth. Revenues rose 39% YoY, marking the 27th consecutive quarter above 30%.”

Mercado Pago: Credit Card Portfolio Fuels Expansion

Mercado Pago had a strong quarter. Monthly active users accelerated thanks to UX improvements, credit card investments, and growth in interest-bearing accounts. Credit card usage and share of wallet increased in Brazil, Mexico, Argentina, and Chile. The loan portfolio expanded without compromising credit quality, and more Credit Card accounts are reaching profitability. In Chile, Mercado Pago MAUs grew 75% YoY.

Mercado Libre funds credit card loans through borrowing. Profitability typically lags until users maintain balances and pay interest for a period. This margin compression is expected during portfolio growth. Commerce President Ariel Szarfsztejn noted that credit card customers become profitable after two years. In Brazil, where cards launched in 2021, cohorts from 2023 and earlier—about 50% of cards—are profitable. Mexico, which began issuing cards in 2023 with Visa, is not yet profitable. Argentina only started issuing cards late in the quarter. The business is hampered by high rates and reduced net interest margins due to inflation.

Mercado Pago benefits from Mercado Libre’s e-commerce market share which lowers credit card customer acquisition costs. This is an example of the mutually reinforcing competitive advantages of Mercado Libre’s ecommerce and fintech businesses.

The investor might question, Given the perennial economic difficulties in markets such as Argentina, and the expected margin compression as the company invests in Mercado Pago credit growth, what should he expectations? Mercado Libre’s 25-year track record of overcoming impressive hurdles and building synergies supports confidence in management strategy and execution.

The credit card growth reinforces Mercado Libre ecommerce in various ways.

Credit cards drive financial inclusion. Many new holders never owned a card before—especially in underbanked markets like Mexico, where Mercado Libre ranks second in MAUs among all financial enterprises, including banks, and first in app downloads. Credit cards accelerate e-commerce adoption.

The Mercado PagoCredit Card has boosted loyalty. It is one of the few cards with no annual fee in its markets, and various incentives boost usage on MELI ecommerce as well as offline. In Brazil, the Mercado Pago cards leads on-platform and dominates installment transactions, aided by extra installment incentives. Despite Brazil’s economic slowdown, Mercado Pago’s credit card TPV grew 28% YoY, with over 50% off-platform, signaling broader wallet adoption. Principality in Brazil rose 11 points, driven by three factors: credit cards, interest-bearing accounts, and salary deposits (the latter pending a banking license in Mexico). The cards integrate with the Meli Plus loyalty program, incentivizing usage both online and offline.

Mercado Pago’s credit card strategy has resulted in portfolio growth of 83% yoy. The card introduces new consumers to digital payments, and incentivizes purchases on Mercado Libre ecommerce, buttressing the competitive advantage of switching costs for the customer.

Reduced Delivery Charges leading to Ecommerce Sales Growth

Another salient achievement noted in the earnings call, was the growth spurt in Mercado Libre ecommerce during the quarter in Brazil. This resulted from the strategic reduction in shipping charges to customers purchasing online.

In the previous quarter, in Brazil MELI had decided to lower the price threshold to obtain free shipping of purchased items from R$79 to R$19 (R$19 is approximately $3.5). During the current Q3 FY 2025, this resulted in increased rate of growth in number of items sold from 26% to 42% yoy. GMV growth increased from 29% to 34% yoy. NPS reached an all time high. The number of listings has increased sharply in the R$19 to R$79 price range, as new sellers were attracted,

Not only did the expanded free shipping incentive to purchase result in increased ecommerce sales. In addition, the higher transaction volumes enabled MELI to reduce per unit shipping cost in Brazil by 8%, because the slow delivery shipping option enabled more complete utilization of shipping capacity. The slow delivery is a shipping option a purchaser can choose, which allows free shipping with more flexibility in delivery date, allowing MELI to optimize utilization of its containers and network. As CFO Martin de los Santos described, this will be part of a long term process of optimizing the slow shipping layer of the logistic network, as the company iteratively improves its process and technology

In Mexico as well, increased sales volume enabled optimized utilization of logistics. Here, as GMV growth accelerated, per unit shipping and fulfillment costs continued to fall. In this case, without the specific new incentive of expanded free shipping.

The decision to lower shipping costs resulted in higher sales volume, and Mercado Libre employed its competitive advantage of scale, as the relatively fixed costs of the logistics infrastructure carried the increased sales volumes.

Mercado Libre Adapted to Market Challenges, with Fintech Revenue gradually outpacing Ecommerce. Concluding Evaluation.

Concluding Evaluation

While revenue has grown consistently at a high rate, diluted EPS has grown with a bumpier course. With a decrease in 2017, and annual earnings did not exceed the previous level of 2016, until 2022. Over the decade, annual diluted EPS grew from 1.63 in 2014, increasing 12 times to 19.46 in 2023.

Between 2014 and 2023, top line revenue has grown at an average annual rate of increase of 42.4%. GROSS margin was 71.4% in 2014, fluctuated slightly while trending down over time, ending at 49.8% in 2023. Outstanding for an ecommerce business.

The more uneven progression in earnings can be traced to recurrent increases in expenses which are required to build out the business. Periodically, increases in operating expenses are generated by increases in shipping costs, marketing expenses, increased cost of goods sold related to increased sales of MPOS devices, and increasing salaries. Note that total employees grew 22.4 times, from 2,599 in 2014 to 58,313 in 2023.

As earnings grow unevenly, the ROIC is correspondingly of uneven growth. (Remember that Return on Invested Capital has earnings in the numerator, in the form of Net Operating Profit after tax). ROIC recovers as earnings do, in years following periods of increased operating expenses. One of the issues with Mercado Libre, small cap company, growing rapidly in an “emerging market”, is the issue of requiring large increases in operating expenses in order to build out the business, and the lumpiness of earnings this causes.

We can consider the uneven earnings history in the context of the demonstrated history of the company’s ability to build out the business, in spite of challenges, and successfully persist in growing revenues with a fairly consistent gross margin. It is this history that allows us to have faith in an investment in this company. Increased operating costs were necessitated by the need to address challenges in the market: the need to create fintech services including MPOS capability and credit cards, the need to establish efficient logistics and shipping network, the need to market the company in the immature ecommerce market. And these various novel branches of Mercado Libre reinforce the competitive advantages. There, the historically recurrent increases in operating costs are demonstrably part of the company leadership efforts to adapt to the demands of the market in such a way that enhances the competitive ability of the various capabilities of the company. Sounds like our type of investment.

The gross margin is quite satisfactory. This is important because this means the market opportunity is supports the business. Demand for this differentiated product and services enables pricing which supports the operating expenses needed to build out the business.

Balance sheet is adequate, showing that MELI has cash flow adequate to fund the capital expenditure required to build the company. Debt/equity a bit higher than normal for my portfolio at 1.56 but interest coverage is satisfactory at more than 6.

Free cash flow is very consistent, and Free Cash Flow Margin currently over 30%, confirming the ability to meet demands of Capex for the growing company.

Regarding valuation, the Free Cash Flow to Enterprise Value ratio is 15.8, which incredibly enough, is lower than it has been for the past 10 years.

Enough said for this brave little company.

Mercado Libre: Mutually Reinforcing Ecosystem Capabilities

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May 16, 2024.

MercadoLibre aims to widen the number of users of its off-line, digital payments as well as ecommerce services, by providing digital technology payment and wider fintech solutions.

We will review the various segments within Mercado Libre marketplace and Mercado Pago, and describe in more detail how their functions mutually reinforce each other to strengthen the competitive advantages of the company. There are 6 main ecommerce and digital finance services:

1. The Mercado Libre (ML) Marketplace.

Wide, non-specialized assortment of goods, includes first party sales as well as small business vendors and large brands.

2. Mercado Libre Classifieds

Users list and purchase motor vehicles, real estate and services, for a Listings placement fee. Classifieds are a major source of traffic to the platform, benefitting both the commerce and fintech businesses.

3. Mercado Shops online storefronts solution

Users manage and promote their own digital stores, hosted for free by ML .

4. Mercado Ads

Businesses promote their products on the ML and MP platforms. First party data is available to create and target particularized audiences.

5. Mercado Pago (MP) Fintech Platform

Currently, MP processes and settles 100% of transactions on ML marketplace in its largest markets: Argentina, Brazil, Mexico, Colombia, Chile, Uruguay, Peru and Ecuador, and virtually all transactions in the remainder.

MercadoLibre ecommerce development was challenged by a significant population of persons and small businesses that were underserved by the payment and financial industry and therefore could not liberally participate in ecommerce. MP was born in 2003 as a fintech solution enabling users to send and receive payments on ML. It evolved to extend its services as an online digital payment app to third party online ecommerce sites. MP digital payments infrastructure enables other ecommerce sites, via MP branded or white label SDKs. Thus, MP has played an important role in enabling the development of LATAM ecommerce. It has also provided a second line of revenue, after the ML marketplace, for Mercado Libre.

MercadoLibre has developed “online-to-offline” (“O2O”) products which enable use of financial services in other than online commerce.

The engine to extending the competitive advantage of MercadoLibre from its ecommerce platform to the brick and mortar financial services market, lies in incentivizing the use of Mercado Pago payment tools for transactions off the Mercado Libre marketplace. Key to this incentive, is the rapid expansion of ML platform users, who adopted MP in order to pay online at ML.

“Online-to-Offline” payments products include:

1. In store payments via MPOS (mobile point of sale) devices and QR codes.

Generate revenue by sale of devices. MP acts as the merchant acquirer for debit/credit card shopping transactions, generating fees. Off-line merchants are incentivized to use the MP MPOS device because in this way they capture the expanding number of customers for whom the Mercado Pago digital account or credit card is top of wallet, or in fact their only non-cash payment device. These customers might previously have been unbanked, and therefore limited to less convenient and less frequent cash purchase.

2. An app based digital account for personal digital payments

3. Debit cards to spend from the MP digital account

4. Credit Card, in Mexico and Brazil.

In 2023 Visa branded Mercado Pago Credit Cards launched with rapid adoption in a collaboration which added VISA tokenization among services which enhance transaction security.

5. Insurance such as warranties

6. Savings and investment products

Interest earning savings products bring unbanked persons into the financial system, and attract them to participate in the MercadoLibre network.

7. Cryptocurrency trading , in Brazil, Mexico and Chile.

Mercado Pago, includes Mercado Credito.

Created in 2016, Mercado Credito offers credit to the Mercado Libre ecosystem consumers and merchants, on the MP app and on the ML marketplace.

Mercado Credito has competitive advantages in underwriting its credit, one which relies on consistent investments in technology to pervasively digitize and harness the data that arises from users of the Mercado Libre ecosystem. Mercado Libre collects primary data from thousands of user touchpoints within the ecosystem. Machine learning and artificial intelligence generate a credit score based on user/seller behavior in the ecosystem. Note that for a number of customers, these interactions may be their only salient activity in the financial system.

By leveraging digital user and seller data from the Mercado Libre ecosystem to determine credit scores in internally developed models, MP can provide credit to users and merchants in an economic landscape in which conventional financial businesses have difficulty identifying good credit risks, given the relatively underbanked status of the persons and businesses.

Mercado Pago has a competitive advantage in distribution, in that it offers credit seamlessly at the point of online sale, priced according to the proprietary scoring system.

Mercado Credito offers credit to users, sellers, and as credit/debit cards.

Sellers Mercado credit extends credit based on sellers historic amount of sales. Bear in mind that availability of credit to small businesses in Latin American economies is lower than in more developed economies. Sellers are thus tied to the platform with switching cost. Interest and principle can be pulled from seller revenue.

For purchasers, Mercado Credito offers a buy now pay later (BNPL) product which can be used on or off the ML marketplace, or at any payment transaction that involves MP. At checkout, if the user has a credit line, it will allow them to buy on installment by paying interest. Personal loans can be accessed directly through the MP app with the funds deposited into the user’s account. Credit increases user engagement.

Credit card: Mercado Credito enables digital payments for users on and off ML platform, without a conventional bank account. Proprietary models running in the Mercado Pago cloud control credit issuance.

6. Mercado Envios logistics services

Currently available in Argentina, Brazil, Mexico, Colombia, Chile, Uruguay, Peru and Ecuador. Enables sellers to utilize third party logistics services while providing fulfillment and warehousing services. These services reduce friction between buyers and sellers, integrate the full user experience. Moreover, sellers access shipping subsidies to offer free/discounted shipping. In 2020 Meli Air fleet of delivery aircraft began in Brazil and Mexico and are expanding. The Meli Places network of neighborhood locations to receive and store packages in transit. Buyers and sellers can pick up, send or return packages locally.

Mercado Envios logistics provides better service than national carriers, keeping customers and sellers with the platform. Warehousing enables more efficient inventory turnover, which accelerates sales for sellers. Execution of the strategy has been excellent, approximately 50% of Mercado Envios goods are shipped within 24h, and 75% within 48h. Virtually all Mercado Libre marketplace sellers ship via Mercado Envios.

The Meli+ Loyalty Program is a subscription that enables points, digital entertainment services, offers expanded free shipping. In addition, it optimizes costs in shipping by allowing buyers to schedule a slower shipping date. The company groups packages and otherwise uses scale to lower costs. In Q1 2024, approximately 5% of shipping was placed on these slower shipment, user scheduled dates, indicating program adoption, and likely reduced shipping costs (Q1 2024 Earnings Presentation Q/A). The program was relaunched In Brazil and Mexico in 2023, replacing the previous loyalty program which had proved inadequate. The goal of Meli + is to increase user engagement and this in turn increases seller engagement.

In summary, the Mercado Libre ecosystem includes mutually reinforcing capabilities. The expanding number of Mercado Libre marketplace users incentivizes brick and mortar merchants to accept Mercado Pago digital payments via credit, debit and wallet. Expanded digital finance services bring previously unbanked customers, to the Mercado Libre ecosystem. Digital technological cloud assets enable Mercado Libre to leverage customer usage data from its ecommerce platform to sell credit to its relatively novice buyers and merchants, which also ties them to the ecosystem with switching costs. Efficient logistics services enhance seller sales growth, and this attracts buyers. Growth in ecommerce attracts Ads sales.

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