Latin American e-commerce giant MercadoLibre (NASDAQ: MELI) has capitalized on fundamental growth prospects for years. Sometimes, however, often-overlooked factors can hold back a stock. One trend that isn't sexy but has played a major yet often misunderstood role throughout first-quarter earnings season has been the newest accounting method from the Financial Accounting Standards Board with respect to revenue recognition, and MercadoLibre found itself in the crosshairs of the new standard's potential negative impact.
Coming into Wednesday's first-quarter financial report, MercadoLibre investors expected extremely strong sales gains, although they were ready to see some deterioration on the bottom line. MercadoLibre remained fundamentally strong, but some of the numbers were negatively affected by the changed accounting standards, disappointing some of those who were looking for even healthier-looking performance from the e-commerce company.
How MercadoLibre started 2018
MercadoLibre's first-quarter numbers look like a disaster at first glance. Revenue growth amounted to just 19% to $321 million, falling well short of the roughly 50% sales gains that investors had wanted to see. Net losses of $12.9 million translated to a per-share loss of $0.29, which was far worse than the $0.42 per share in profit that represented the consensus forecast among those following the stock.
Accounting changes were massive, though. For instance, the new method required MercadoLibre to take out $112.5 million in shipping subsidies for the first quarter. If you added that number back in, revenue growth would have risen to more than 60%, topping what investors had expected. In addition, currency impacts came into play, as currency-neutral revenue growth was 11 percentage points higher at 30% even with the headwinds from the new accounting standards. There was also a massive shift in sources of revenue, with enhanced marketplace revenue falling 21% but nonmarketplace revenue nearly doubling from year-ago levels.
MercadoLibre's fundamental business metrics looked largely solid. Gross merchandise volume was higher by 34% to $3.13 billion, and items sold jumped by more than 50% to 80.1 million. Live listings on the marketplace were also up 50% to 127.1 million, and unique buyer counts were higher by 28%, largely from strength in Brazil and Mexico. Confirmed registered user counts climbed by 11.2 million over just the past three months to 223.1 million, and the pace of growth accelerated from previous periods.
The company's other businesses more than pulled their weight. Total payment volume for the MercadoPago payments business soared more than 60% to $4.18 billion, and the service processed 74.3 million transactions during the quarter, up 69% year over year. MercadoEnvios shipments nearly doubled to 52.5 million, and shipment volumes in Mexico nearly tripled from year-ago levels. Merchant services gained traction, with nonmarketplace off-platform total payment volume more than doubling after adjusting for currency impacts.
What's next for MercadoLibre?
CFO Pedro Arnt couldn't say enough things about the success that MercadoLibre has had. "We are as excited as we have ever been about growing our business," Arnt said, "building on our market position as a leading innovator in Latin America and leveraging our regional breadth, trusted brand, and increasing installed base of engaged users."
Going forward, MercadoLibre intends to focus more on its broader business plan. As the CFO explained it, that includes maintaining its position as the leading e-commerce provider in Latin America while balancing the need for profitability against reinvesting in its business to stay innovative. The right balance should produce the share-price gains that investors want.
MercadoLibre investors focused more on short-term results than long-term prospects, however, and the stock was down 5% in after-hours trading following the announcement. Fundamentally, MercadoLibre still looks strong, and the e-commerce giant has done a good job of fending off competition. As long as accounting-based changes remain a one-off event, shareholders should eventually regain their confidence in the long-term prospects for MercadoLibre's business.
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