Might eBay Buy Its Latin Partner?

07/08/2009 1:15 pm EST


John Christy

Founding Editor, Forbes International Investment Report

John Christy, editor of the Forbes International Investment Report, likes Mercado Libre's fundamentals, even though the stock's not cheap.

We’ve come a long way since the days when online auction sites were just a curiosity for collectors of Pez dispensers. In less than 15 years of existence, eBay (Nasdaq: EBAY) has grown from zilch to $9 billion a year in revenue.

The scale of long-run opportunity is even bigger overseas, particularly in emerging markets. Consumers in the developing world find themselves with more money to spend these days, but not necessarily more local shopping destinations. In the US you can’t drive 20 minutes without being very close to a shopping mall. But that’s hardly the case in Brazil or Venezuela, once you get outside the big cities. That has created a huge opportunity for MercadoLibre (Nasdaq: MELI), which is Latin America’s largest online shopping site and eBay’s exclusive partner in the region.

As is the case with a number of the companies that we have recently profiled, MELI was born under a bad sign. Its IPO, at $18 in August 2007, came just as the wheels were starting to fall off the global growth engine. MELI shares quickly shot up as high as $79 by December 2007, only to crash below $10 last November. At a recent $24, MELI is 33% above its offer price, but it has been a wild ride. Shares remain volatile. On May 6, MELI plunged 4% after the company announced first quarter results. But the numbers weren’t all that bad. Revenue rose 12.1% to $32.3 million. Gross merchandise volume (GMV)—a measure of how much stuff is being sold on their platform—was up 40.7% when measured in local currencies, or 29.4% in US dollar terms.

It’s important to keep the bigger picture in mind. MercadoLibre has a young, dynamic management team that understands both Latin America and Silicon Valley. Chief executive Marcos Galperin founded the company while in business school at Stanford and later sold a 19.5% of the company to eBay, which remains an important strategic partner. There has been a lot of speculation about whether or not eBay might swallow up the remainder of the company, as it did with the Korean online shopping site Gmarket in April. Officially, Ebay has said they’re comfortable with the status quo, but what else would you expect them to say?

While the takeover speculation is just anybody’s guess, there’s little doubt about MELI’s fundamentals. Profitability is solid, with nearly 80% gross margins and 16% net margins. Last year return on equity was a robust 23%. The balance sheet is also healthy. At the end of the first quarter, the company had $46 million in cash on hand against debt of $19 million. Analysts expect earnings of 78 cents per ADR for fiscal 2010, or about 30 times the current share price. Not exactly cheap, but MELI has the growth potential to justify a premium valuation. Net income doubled last year, and over the next five years analysts are looking for 35% annualized growth.

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