MercadoLibre Earnings Reveal a Sleeping Giant That's Waking Up

By Danny Vena Markets Fool.com

For much of its history,MercadoLibre, Inc. (NASDAQ: MELI), the leader in the Latin American e-commerce market, has performed admirably. It has dealt with the devaluation of the currency in Venezuela, hyperinflation in Argentina, and economic and political headwinds in Brazil. Add to that the fact that the company does all of its business in the currencies of those various countries while reporting in U.S. dollars, and it seemed as if the deck was stacked against the company. Yet it just kept chugging along, executing operationally and waiting for the headwinds to die down.

Continue Reading Below

When the company reported its financial results on Thursday, investors expected it to continue as it had. Over the past several quarters, the stability in the dollar and the improving economic and political climate in the region had gradually seen those headwinds abate. These improving conditions provided a springboard for MercadoLibre's already positive operational results and propelled its financial results to new heights. The stock jumped 16% on the news.

E-commerce in Latin America is heating up. Image source: Getty Images.

Financial results follow operational excellence

Operationally, the company continued its blistering performance. The three operational metrics that strip out the currency effect are registered users, items sold, and payment transactions. MercadoLibre's confirmed registered users reached 182 million, growth of 20% year over year, which it has achieved on average every quarter for the past five years. Items sold increased by 39% to 53.2 million over the previous year's quarter, which has accelerated by 40% on average over the past five quarters. Payment transactions grew 60% year over year to 44.1 million, which represents the ninth consecutive quarter of growth of over 60%.

Users grow 20% year-over-year. Data source: MercadoLibre. Chart by author.

Continue Reading Below

Financially, results have improved markedly. Revenue increased 79% on a foreign exchange-neutral basis and 74% in U.S. dollars over the prior year quarter to $274 million. Net income grew 60% to $48.5 million, driven by gross merchandise volume, which increased 61% year over year in constant currency to $2.33 billion, and by total payment volume, which grew by 81% year over year on a foreign exchange-neutral basis to $2.6 billion.

Items sold grew 39% year-over-year. Data source: MercadoLibre. Chart by author.

Years of investment coming to fruition

So what is driving all this phenomenal growth? Several things. The stability of the dollar is no longer acting as a headwind, which was masking the results because of currency translation. The overall improvement of the economy in Latin America also contributed.

Operationally, however, there are several significant contributors to the company's recent success. Early in its history, the company was referred to as the eBay (NASDAQ: EBAY)of Latin America. Over time, however, MercadoLibre moved from an auction and person-to-person model, added merchants to its platform, and began its own fulfillment, similar to a structureAmazon.com, Inc. (NASDAQ: AMZN)uses. The company also made significant investments to its platform, making it more customer friendly.

Payment transactions grew 60% year-over-year. Data source: MercadoLibre. Chart by author.

Payments exhibits explosive growth

The company also began offering its MercadoPago payment service, which was modeled after PayPal Holdings, Inc. (NASDAQ: PYPL), as an off-platform option. Latin America lags behind the U.S. in credit card adoption and usage, so this service has been experiencing explosive growth. While previously only offered to MercadoLibre customers, MercadoPago is now becoming the preferred payment method for a variety of off-site vendors and includes a mobile wallet app that customers are using for utility and bill-payment services. "MercadoPago's strong results this quarter demonstrate that we are well on track to consolidate our payments business as a regional leader in open digital payment platforms,"CFO Pedro Arnt stated.

The number of sellers increased 14% year over year, and the number of items purchased grew by 15% per user over the prior-year period. MercadoLibre has also been testing free shipping in a number of markets and building out its logistics capability. These moves also contributed to the company's growth.

Investor takeaway

By providing a wide assortment of tools to both customers and vendors, the company is increasingly benefiting from the network effect and a virtuous cycle: More customers encourages more vendors, and the increase in products brings more customers. The widespread adoption of its payment option by customers and vendors, both on and off its platform, continues to provide a competitive advantage. Consider this quote from Arnt during the company's earnings conference call:

"These figures I have just walked you through ... starkly contrast with physical retail sales in those countries, which are growing less than 5%. Figures like these are the ones that not only give us confidence that there is still significant room to continue gaining share from online retail as well as off-line retail, but also that secular tailwinds continue to trump macroeconomic headwinds for our business."

Arnt also stated that 2016 was the best year in its history, and 2017 seems to be following that trend. By focusing on improving both the customer and vendor experience, MercadoLibre has set the stage, and it looks as if the best is yet to come.

10 stocks we like better than MercadoLibre
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and MercadoLibre wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of May 1, 2017

Danny Vena owns shares of Amazon, MercadoLibre, and PayPal Holdings. Danny Vena has the following options: long January 2019 $18 calls on eBay and short October 2017 $34 calls on eBay. The Motley Fool owns shares of and recommends Amazon, eBay, MercadoLibre, and PayPal Holdings. The Motley Fool has a disclosure policy.