MercadoLibre: Shopping in Latin America

03/08/2016 10:00 am EST

Focus: STOCKS

This featured stock operates e-commerce marketplaces in more than a dozen Latin American countries, explains R.J. Hottovy in Morningstar StockInvestor.

MercadoLibre (MELI) generates more than 90% of revenue from Brazil, Argentina, Venezuela, and Mexico.

The company also offers online payments through MercadoPago, paid search advertising through Mercado-Clics, online store management through MercadoShops, and third-party logistics through MercadoEnvios.

We believe MercadoLibre has an expanding narrow moat thanks to strong network effects and economies of scale, which solidify its leadership position in Latin American e-commerce.

Consumers are drawn to MercadoLibre’s marketplaces because they offer the widest selection of products at competitive prices.

This, in turn, makes the platform the most desirable place for sellers to list their merchandise, leading to a virtuous cycle.

Network effects are also present in the payments business, as merchant acceptance drives consumer usage, and vice versa.

Bears note that Latin America is confronting serious macroeconomic and political troubles, from a severe recession in Brazil to hyperinflation in Venezuela.

Foreign currency depreciation has also been a major headwind for MercadoLibre, which reports results in US dollars.

Further, Latin America’s e-commerce market is still in a nascent stage of development, making it difficult to forecast MercadoLibre’s long-run cash flows.

On the other hand, bulls suggest that MercadoLibre is poised to benefit from rising adoption of online and mobile commerce.

Internet penetration in Latin America remains relatively low at 55%, with around 40% of Internet users active on MercadoLibre. E-commerce accounts for less than 5% of retail sales in the region, leaving plenty of room for growth.

Bulls also point out that MercadoLibre could attract takeover interest from a global e-commerce firm looking for a head start in Latin America. EBay (EBAY) is a logical suitor, since it already owns 18% of MercadoLibre.

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