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University of Notre Dame Investment Club MercadoLibre (NASDAQ: MELI) Matt Jennings and Brayden Bishop November 8, 2018. Investment Thesis. MercadoLibre is a multi-segmented, fast growing e-commerce company – however - intrinsic valuation suggests that ML is overpriced. 1.
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University of Notre Dame Investment ClubMercadoLibre (NASDAQ: MELI)Matt Jennings and Brayden BishopNovember 8, 2018
Investment Thesis MercadoLibre is a multi-segmented, fast growing e-commerce company – however - intrinsic valuation suggests that ML is overpriced. 1 MercadoLibre differentiated segments allows for it to monetize multiple times off the same customer. As business segments such as MercadoPago and MercadoEnvios reach economies of scale, profitability of the company will increase. 2 MercadoLibre has proven to be a non-cyclical business in a cyclical region. Latin American countries have a reputation of instability and MercadoLibre has shown revenue growth during recessionary times in Latin American countries. 3 A combination of an experienced management team, strong South American identity, and young composition of Latin American countries positions MercadoLibre for long-term growth and withstanding the Amazon effect. Target Price: $374.65 Current Trading Price: $349.56 Upside: $452.24 Downside: $133.90 Recommendation: HOLD
Mercado Libre Company Overview Overview Management Team Business Segments Revenue Growth ($mm) • One of the largest online commerce ecosystems in Latin America, providing a complete portfolio of services to complete commercial transactions • Listing services, supported user web fronts, financial services, shipping services, and asset management • Offer identical technological platforms in each country of operation, but features a standalone website on the MercadoLibre platform • Launched August 1999 • Online marketplace providing buyer/seller interaction • Launched November 2003 • Offers secure user-friendly payment services both on and off the market place Presence throughout South and Central America, including Mexico and Portugal • Launched February 2013 • Shipping service for market place users offering integrated shipping at competitive prices Key Strategies Improve shopping experience for users through innovation Continue to grow business and maintain market leadership Expand into additional transactional service offerings Increase monetization of transactions Capitalize on natural synergies that exist between the Mercado Libre service • Marcos Eduardo Galperin • Co-founded Mercado Libre in 1999 • Prior experience in software solutions and emerging tech CAGR: 29.4% Average Net Income Margin: 3.43% • Meyer MalkaRais • Director of ML since 2013 • 20 years of experience building and investing in technology and financial services across three continents
Mercado Libre Revenue Streams 1 Mercado Shops Mercado Pago Mercado Envios Classified Services Market Place Advertising Services • Shipping service for marketplace users, offering cost-efficient integration with shipping carriers through ML platform • Revenue streams: shipping charges • Operational Costs: collection fees and shipping costs • Online integrated payments solution facilitating transactions both on and off the marketplace • Revenue streams: commissions, interest, fees from merchant and customer credit • Operational Costs: bank processing charges • Online commerce platform engaging buyers and sellers in transactions • Revenue streams: final value and up-front fees • Operational Costs: customer support, buyer warranties • Fully hosted online store solution for user merchants with compatible services through MercadoPago and MercadoEnvios • Revenue streams: Subscriptions • Operational Costs: Web hosting costs • Enables large retailers and various consumer brands to promote their products and services through on-page ML ads • Revenue streams: Customer charges • Operational Costs: Web development and hosting • Marketplace service that enables users to list their offerings related to motor vehicles, vessels, aircraft, real estate and services • Revenue streams: final value and up-front fees • Operational Costs: customer support, buyer warranties
Selected Financials 1 2009-2017 GMV and TPV Trends
Latin America E-Commerce Market 2 ML Reach Among Internet Users 2017 Demographic Structure Latin America Retail % • Market for e-commerce is largely dependent on the development of networks in the Latin American region • Industry is relatively underdeveloped compared to e-commerce industry in the U.S • Latin America is a region with over 635 million people and MercadoLibre currently has 211.9 million users and growing • Relatively low-barriers to entry encourage new online marketplaces to compete with existing firms • 25% of Brazilian smartphones already carry one of MELI’s apps Online Retail Visits Latin America 2018 Latin E-commerce Industry Growth
MercadoLibre Country Specific Growth 2 Mexico Brazil Argentina
Fighting the Amazon Effect 3 Argentina (google search hits) Mexico • Amazon launched full retail in the country in June 2015 offering a fully stabilized online retail store • 38% of Mexican consumers who made online purchases used MercadoLibre while just 21% of users visited Amazon • Units sold in Mexico have increased by triple digits in three consecutive quarters for MercadoLibre • Through MercadoEnvios, ML has been able to increase market share by offering free shipping, an option Amazon has yet to pursue Google search hits Brazil (google search hits)
ML reports discouraging 2018 Q1 results: $29.4mm loss from operations $12.9mm net loss 34% YoY GMV increase ML reports strong 2016 Q4 results: 41% YoY GMV increase 72.6% YoY MercadoPago growth 91.4% YoY MercadoEnvios growth ($1.54) ($0.29) ($0.25)
Risk Factors Barriers to Operational Growth Dependence on Consumer Attitudes • Growth limited in regions with low levels of internet penetration and high levels of poverty • Inadequate network infrastructure could stifle the continued growth in the number of Internet users and their frequency of use • Resource strain from strategic choice of management to expand operations through promoting new, complementary services, such as MercadosEnvios • Delays with technology infrastructure would have an immediate adverse effect on ML public perception and usage • Unfavorably received services promoted by Mercado Libre would diminish the value of ML brands and damage the ML reputation • Reliant on commercial activity generated by user for revenue • Buyer protection programs • Rapidly evolving nature of e-commerce industry disallows accurate forecasting • Current and future expense levels largely fixed • Consumer trends place significant strain on infrastructure and transaction capacity Competitors Regulatory and Legal Changes • Currently scare internet regulation in operating regions • Ambiguity allows for a number of lawsuits to be charged against ML • May be subject to newly enacted privacy/commerce/antitrust regulations in the future • 2017 Venezuelan deconsolidation • Fluctuations in local currency have a material impact on revenues • Current and new competitors can launch new sites at relatively low costs using commercially available software • Growing number of local brick and mortar retailers • Competition with other online listing services as well as other large communities facilitating online interaction and e-commerce such as Facebook and Google
