By Patricia Gonzalez
Senior Analyst, Emerging Markets Equity
Strong fundamentals outweigh valuations as we take a look at MercadoLibre, a fintech-based LatAm company that is positioned well for growth in emerging markets.
MELI – Leading Fintech in the Emerging Markets Space
Over the last 12 months, there has been an unprecedented sell-off in fintech and e-commerce stocks globally. Valuations for many of these companies have come under significant pressure and now trade at or close to historical lows, as investors begin to digest the potential of a new paradigm where interest rates remain higher for longer. However, there are select companies, some of which are included in the core VanEck Emerging Markets Fund (the “Fund”), where underlying fundamentals remain robust and continue to deliver strong growth momentum even in a post-pandemic world.
MercadoLibre Inc. (“MELI”) (3.28% of Strategy assets) is a prime example. Driven by the digital platform, scale and efficiency gains, MELI continues to be an exceptional company, off index, all process-driven – further supporting our statement that the Strategy’s investment philosophy and process do work over time.
Investment Case for MercadoLibre: An Exceptional Company
MercadoLibre is Latin America’s (“LatAm”) leading e-commerce platform and the company is on the way to becoming a dominant player in the fintech space as well. It is the top e-commerce third party (“3P”) marketplace1 and digital payments operator in the region,2 with a presence in 20 countries and a user base of 37 million unique buyers. We believe the fintech (digital payments) business model is a long-term value driver for the company.
Our investment case for MELI was threefold, based on structural growth opportunities:
- E-commerce: E-commerce penetration in LatAm is extremely low, as indicated in the chart below. Furthermore, blended marketplace take rate3 is ~10% – indicating there is still room for growth (vs. Amazon = 15%). As it relates to Brazil, which is the largest market in LatAm, e-commerce is lagging penetration versus more mature markets as well, creating a compelling opportunity for structural growth investing over time.
E-Commerce Penetration Across Geographies
Source: Euromonitor, BofA Global Research. Data as of March 31, 2022. E is defined as Estimates. E-commerce sales as a % of total retail, Retail Value RSP excluding Sales Tax.
Competitive advantage – MELI has consistently been able to increase its market share in Brazil from ~15% in 2014 to ~35% in 2019, while competitor share has either been flat or down. The source of this sustainable, structural growth comes from a highly competent and responsible management team, capable of making well-thought-out decisions to unlock long-term growth.
- Logistics – We believe that logistics is one of the main competitive advantages of MELI, it is the key differentiator in the space and will become an area of monetization. Management’s decision to bring logistics in-house has allowed for a higher quality of service, lower costs and shorter delivery timelines, which resulted in higher NPS (“Net Promoter Score”), a better customer experience and, ultimately, helped market share growth over time. Over the last 12 months, MELI has more than doubled its distribution infrastructure, adding new holding capacity, cross-docking and mini-hubs, while also building a network of thousands of small locations that are rapidly evolving into full consumer and merchant service centers. Today, the company does 85% of their sales through their management network and in some areas the number exceeds 90%. As a result of the company’s position in logistics, we believe that it will continue growing well above industry averages despite weaker economies and the opening of physical stores.
- Diversified category offering – MELI has also been improving and expanding its end-consumer product offerings by adding new categories like consumer health, home care, pet care, etc. The management team has been discussing groceries and apparel as areas of growth as well. We believe product diversification is another important competitive advantage, as it allows the company to have a lower dependency on laggard categories from recent quarters, such as electronics and appliances as an example, and/or categories that might have been impacted by competition, such as Magalu and Via Varejo.
Table 1: Consolidated Gross Merchandise Value (“GMV”)
Consolidated GMV (US$mn), y/y (%).
Source: BTG Pactual, Company Data. Data as of March 8, 2022.Gross merchandise value (GMV) is the total value of merchandise sold over a given period of time through a customer-to-customer (C2C) exchange site. It is a measure of the growth of the business or use of the site to sell merchandise owned by others.
- Fintech: Latin America is mostly serviced by an oligopoly banking system characterized by high rates and high fees that tend to marginalize a big part of the population, including small- and medium-sized businesses and low-income consumers, as indicated in the chart below. This setup has created a massive growth opportunity for MELI that focuses on servicing the marginalized demographic through the Mercado Pago (“PAGO”) product offering. Furthermore, given the recent push by regional Central Banks to accelerate financial inclusion across regions, we begin to see policies further incentivizing wallet adoption, which will benefit MELI as well. Total payment volume (“TPV”) in the micro-merchant payments market in Brazil, for example, is expected to grow at a 32% compound annual growth rate (“CAGR”) between now and 2023 to reach US$85B. This growth in total addressable market (“TAM”) is driven by technology and its ability to effectively serve and enable the bottom of the pyramid that previously did not have access to affordable financial products.
Penetration Rates are Generally Low
Source: BofA Global Research. Data as of February 11, 2021.
- Competitive advantage – Native user base of 37M unique buyers on their marketplace platform – users can be leveraged and incentivized to use the digital wallet off-platform. Comps in the U.S. and China tell us that scale can, and usually is, a defining feature of players that win in this space. Over the years, MELI has been able to add new and differentiated functionalities to its wallet platform, which should translate into even greater adoption and use over time. The company has focused on the Brazilian credit card market segment and it is estimated that 2M people are already on MELI’s waitlist. We believe the issuer’s fintech profitability model should improve because its credit card business line has grown within its credit portfolio as the company continues to leverage its extensive database. Consumer credit remains a huge opportunity for growth, as MELI has access to its users and user data needed to feed into its credit scoring models.
- Management Team: Intangible competitive advantage comes from MELI’s entrepreneurial management team that has repeatedly been able to stay ahead of the curve and think long term. Examples: #1 think free shipping subsidies that essentially doubled their user base in a four-year period; #2 offering payment installments to customers on the online marketplace to increase affordability – again increasing traffic on their platform.
An Off Index Name
To reiterate, VanEck’s Emerging Markets Equity Strategy is benchmark agnostic. The Investment Team is highly skilled and capable to identify and invest in forward-looking, sustainable and structural growth companies, regardless of their inclusion/exclusion from an index. The fact that MELI is excluded from the index further validates our statement that emerging markets indices are backward-looking by default and, therefore, unable to capture the forward-looking, sustainable and structural growth companies that we are after.
Process-Driven Selection
Our Strategy is a process-driven investment solution designed to access forward-looking, sustainable and structural growth companies across all emerging markets with an emphasis on sustainable business models and responsible management. MELI is emblematic of the Team’s investment philosophy and while the company’s share price has contracted meaningfully since September 2021, the underlying performance of the business could not be more contrasting. Despite the challenging macroeconomic backdrop for technology companies globally, MELI has strung together sequential quarters of strong revenue and crucial profit growth that has exceeded market expectations. The company has exercised its pricing power by raising take rates across business lines.
Conclusion
E-commerce and fintech remain in their nascent stages in emerging markets with relatively low penetration rates. We view MELI as one of the best ways to access these structural growth trends within our investable universe. The company’s strong sequential performance over the last few quarters has only served to boost our conviction in the name, as it demonstrates its pricing power through raising take rates across their business lines. Investment in this company also aligns with a broader focus on trend acceleration within the portfolio—we have reduced “social” consumption based around travel and other “out-of-home” activities, while further boosting our exposure to “remote” consumption implicit in e.g., e-commerce and digital payments. As a result, we currently approach the second half of the year with an optimistic outlook, despite the current market environment.
Originally published by VanEck on May 18, 2022.
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1 The company operates platforms for other businesses to sell its inventory.
2 Includes online payments, offline payments, wallet and credit.
3 A take rate is the fee charged by a marketplace on a transaction performed by a third-party seller or service provider. The take rate is a determining factor in a marketplace’s revenue as reported on its income statement: Take rate * GMV (gross merchandise volume) = revenue.
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