May 16, 2024.
Mercado Libre generates two revenue streams: Commerce Revenue and Fintech Revenue.
Commerce Revenue
A. Revenue related to Services, including fees for merchandise sold, shipping, ads, classifieds, and other services.
B. Revenue from Product sales fees, from first party Mercado Libre product sales and related shipping.
Fintech Revenue
a. commissions for transactions off Mercado Libre ecommerce platform, including digital payments, installment payments, asset trading, credit and debit cards, insurance,
b. interest on loans to consumers and sellers, and on Mercado Pago credit cards
c. Fintech Product Sales revenue from sales of MPOS devices.
Prior to 2020, Revenue was reported differently. Off-Marketplace Revenue corresponded essentially to Mercado Pago Fintech revenue plus shipping, and Ad sales. On-Marketplace Revenue corresponded essentially to Commerce Revenue. If we can for argument’s sake accept equivalence of the historical Off-Marketplace Rev and modern Fintech Rev, and historical On-Marketplace Rev and modern Commerce Rev, then….
Business revenue has grown remarkably over time. In 2013, Marketplace Revenue was $331.3 million. By 2023 Commerce Revenue had increased by 24.7 times to $8.201 billion, a CAGR of 37.84%. In 2013, Off-Marketplace Rev was $141.3 million. By 2023, Fintech Revenue had grown by 44.4 times to $6.272 billion, a CAGR of 46.13%.
Fintech Revenue has grown at a faster rate than Commerce Revenue. In 2013, Off-Marketplace Revenue was 42.6% of the Marketplace Revenue. By 2023, Fintech Revenue was 76.5% of $8201 Commerce Revenue.
Fintech Revenue growth outpaces Mercado Libre marketplace commerce revenue, likely because it is derived from a wider population of users, drawing from the wider market of financial services users, not just Mercado Libre marketplace ecommerce customers. And yet, as previously described, robust ecommerce marketplace growth powered the expansion of Mercado Pago digital payments and fintech products.
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.
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