MercadoLibre's share price has fallen by 5.5%, despite its excellent Q1 results. The decline is all about the broader tech sell-off.
The salient features of the results are as follows:
Net revenue growth was 158% (FX neutral). E-commerce growth was 188%. Revenue exceeded consensus by 19%, albeit in line with Tellimer's above-market FY 21 forecast.
EBITDA rose by 16.4x qoq, exceeding consensus by 10%.
Management has committed to improving average revenue per user, as opposed to user acquisition. If executed, this would improve operating margins.
In our view, investors should accumulate this name in the face of the tech sell-off. The stock-specific fundamentals are as follows:
MercadoLibre is a mature company compared with its 'Baby Amazon' (EM e-commerce) counterparts, boasting over two decades of operations. We forecast that it will generate a 50% EBITDA CAGR in FY 21-24.
Massive growth potential in LatAm. E-commerce penetration in Latin America is just 5%, compared with 20% in China. E-commerce growth has accelerated during the pandemic in Latin America, but the growth potential remains huge.
Consumer trends seem robust. GMV rose by 77% yoy in Q1 to US$6.1 bn. The company sold 222mn items in the quarter (110% yoy increase). With the pandemic transforming consumer behaviour in LatAm, these numbers are not a one-off – surveys show that new adopters of e-commerce plan to maintain their usage.
Digital payments business has not been fully valued by the market. MELI is the largest payment ecosystem in Latin America. It operates in 18 countries, covering 605mn people. It can be used to pay utility bills and make person-to-person (P2P) transactions. It had a total payment volume (TPV) growth of 82% yoy in Q1.
'Super-app' potential. The company hopes to become a one-stop shop for e-commerce, ride-hailing, payments and other services, like Alibaba. MELI’s valuation does not reflect its potential as a super-app, but we believe its strategy could be successful.
The stock may have more than doubled during the pandemic, but its valuation is still cheap. We value MELI on a DCF and SOTP basis. We value the marketplace business (e-commerce) on a P/GMV basis of 1.66x and the fintech business on a P/TPV multiple of 0.53x. MELI is great value on an EV/FCF basis compared with its Baby Amazon peers.
Our SOTP valuation gives us a 12-month target price of US$1,842, down from US$2014. We have cut the target price because of higher cost of sales assumptions (given rising commodity prices). We retain our Buy recommendation.
We base our SOTP on the following multiples: