MercadoLibre Stock: Stuck in a Precarious Environment (NASDAQ:MELI) – Advice Eating

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MercadoLibre, Inc. (NASDAQ:MELI) recently reported a solid FQ1’22 scorecard. We believe this supports the company’s thesis that the growth of e-commerce and FinTech (offline and online) in Latin America is still in its infancy. In contrast to this was the solid performance of MELI in particular spicy with Amazon (AMZN) and its U.S. e-commerce peers in the first quarter. US e-commerce players continue to face a significant growth slowdown and higher costs. However, MercadoLibre’s well-diversified business across its e-commerce and FinTech ecosystem helped weather the tough FY21 challenges. Notably, MercadoLibre’s offline FinTech business also benefited from the cadence of reopening.

Additionally, MercadoLibre has continued to increase its acceptance rates, demonstrating the company’s price leadership. It has also helped weather a hard rising inflation and interest rate environment in LatAm.

While MercadoLibre is certainly not immune to these macroeconomic headwinds, management is confident it can weather them. It would also invest aggressively in headcount and fulfillment to deepen its competitive advantage over its rivals.

However, MELI stock continued to trade at a premium despite its proven growth opportunities. Therefore, while we believe the stock will consolidate at current levels, we do not expect a significant re-rating in the near term.

We confirm our buy recommendation for the MELI share. However, we encourage investors to add to their purchases to reduce their exposure to dollar average costs.

The MELI share is still valued at a premium

MELI NTM FCF returns % and NTM normalized P/E

MELI NTM FCF returns % and NTM normalized P/E (TIKR)

There should be little doubt that MELI stock has an embedded growth premium. It was last trading at an NTM normalized P/E of 100.76x, although its NTM FCF yield has improved to 2.4%. However, the market environment remains tough for stocks with a significant growth premium.

MercadoLibre has continued to perform confidently despite challenging macros and a more competitive environment. However, investors understandably had doubts about the growth premium. As a result, MELI investors have experienced multiple bouts of volatility as price discovery continues in earnest.

Q1 results were solid, but weaker margin is a concern

MercadoLibre revenue and profitability

MercadoLibre revenue and profitability (S&P Capital IQ)

MercadoLibre reported revenue of $2.25 billion in the first quarter, up 63.1%. It easily beat consensus estimates of $2 billion, up 44.6% year over year. The performance was notable as the company lapped a monstrous FQ1’21 as its revenue rose 111.3% year over year. Additionally, investors were concerned about the moderation in sales growth since FQ1’21. Consequently, FQ1’s robust growth should have convinced investors of its execution despite increasingly challenging macros.

However, the EBIT margin fell to 6.2% after 6.6% in the previous year. The company cabled that it had to grapple with higher operating expenses coupled with a larger provision for credit losses related to its growing loan program. Despite this, the company remains confident in its underwriting standards while expanding its loan portfolio. CFO Pedro Arnt articulated (edited):

If we look at what we’ve done so far in a difficult environment, we’ve been able to steadily increase originations at a good pace in the size of our book. We continue to believe that the data we have on consumers, the consumer touchpoints and the collections capabilities we have built support our competitive advantages in our underwriting. But regardless, I think we need to continue doing that and continue to grow the books in line with our confidence in our underwriting and then we’ll see what happens in the future. But so far all signs remain positive and are being executed according to plan. (Result call from MercadoLibre FQ1’22)

Investors need to watch earnings rates closely

MercadoLibre Usage Rates %

MercadoLibre Usage Rates % (company documents)

MercadoLibre GMV Change % and TPV Change %

MercadoLibre GMV Change % and TPV Change % (company documents)

Its e-commerce and FinTech segments have underpinned MercadoLibre’s revenue growth. However, investors should note that while FinTech (43.2% share of revenue in Q1) has grown faster, e-commerce remains the key revenue driver.

But with expected normalization of e-commerce growth coupled with offline payments product expansion, FinTech could expand much faster in the future. As a result, we’ve also observed that total payment volume (TPV) grew 72% year over year, while e-commerce gross merchandise volume (GMV) grew just 26.5% year over year.

However, e-commerce is still much more profitable given its adoption rates. Regardless, the QoQ e-commerce adoption rate fell to 16.7%, although it was higher than the 15% it recorded in FQ1’21. In addition, the adoption rate of FinTech has continued to rise. However, these increases were necessary to offset higher refinancing rates and higher loan loss provisions given the current interest rate environment. As such, we urge investors to continue to monitor adoption rate progress as it could significantly impact MercadoLibre’s consistency in terms of profitability.

Is the MELI share a buy, sell or hold now?

In view of its embedded growth premium, the MELI share remains entangled in a precarious environment. However, we remain confident that solid execution in a highly challenging environment has demonstrated the resilience of the business model.

Nonetheless, we urge investors to layer their purchases given the inherent volatility of MELI stock.

As well as, we reiterate our buy recommendation for the MELI share.

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