MercadoLibre Gains From E-Commerce In Latin America

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Internet access might be a given in the vast majority of U.S. households, but that's not the case in a lot of other countries.

The Internet penetration rate in South America, for example, was 48% as of June 2012, according to data from market tracker Internet World Stats.

In Central America, the rate was only 33%. That compares with nearly 80% in the U.S.


One byproduct of the comparatively low penetration rate in Latin America is that companies that provide Internet and e-commerce services have plenty of room to grow.

As more consumers in the region gain Internet access and begin buying products online, e-commerce providers should see a substantial boost in sales and earnings in coming quarters and years.

One of those providers isMercadoLibre ( MELI ), which has been dubbed "theeBay ( EBAY ) of Latin America."

MercadoLibre runs the region's largest online shopping center, with operations in Argentina, Brazil, Colombia, Costa Rica, Chile, Ecuador, Mexico, Panama, Peru, the Dominican Republic, Uruguay and Venezuela as well as Portugal.

MercadoPago System

Like eBay, MercadoLibre operates a marketplace website that lets businesses and individuals list items and conduct transactions in a fixed-price or auction-based format. Its MercadoPago payment system operates much like eBay's PayPal system.

MercadoLibre has averaged 31% sales growth and 44% earnings growth over the last three years.

Because the company is so firmly entrenched in the Latin American market, analysts expect it to continue to deliver robust growth as the market expands to include more Internet users.

"We expect the company to be a major beneficiary of strong secular growth drivers in Latin America, such as increasing Internet and broadband adoption and wider acceptance of e-commerce," noted Chad Bartley, analyst at Pacific Crest Securities.

"Additionally, we believe that the deployment of MercadoPago will remove a major friction point for e-commerce and drive accelerating growth in key markets, as well as create a strong new revenue opportunity."

Bartley expects MercadoLibre to grow faster than the overall e-commerce market in Latin America because of internal initiatives to expand the company's services. These include a program to directly connect large retailers to the marketplace and an effort to increase business on mobile platforms.

In 2012, the Latin American e-commerce market grew 32% year-over-year to around $37 billion, according to eMarketer. By comparison, Bartley says, MercadoLibre's revenue grew roughly 38% on a currency-neutral basis.

While Latin American e-commerce is forecast to grow in the low-20% range in 2013, Bartley reckons MercadoLibre is "well positioned to continue gaining share, and that high 20% to 30% growth is sustainable."

That's the case even as MercadoLibre deals with problems in Venezuela, a major market that provided 16% of company revenue during the 2012 fourth quarter.

On Feb. 8, the Venezuelan government said it would devalue the country's currency by about one-third. That announcement was made before the March 5 death of embattled former President Hugo Chavez. His death brought even more uncertainty to the Venezuelan economy.

MercadoLibre shares fell 2.5% to 83.73 on the day the currency announcement was made. Since then, however, the company's stock price has rebounded and currently trades near 94.

Most analysts downplay the impact of Venezuela's troubles on MercadoLibre's performance and stock price.

"Recent devaluation of Venezuelan currency sparked concerns in some market participants regarding MercadoLibre's exposure to the country. We find these concerns exaggerated," JPMorgan analyst Andre Baggio noted in a report last month.

Even with Venezuela uncertainty, analysts expect MercadoLibre to grow annual earnings in double digits well into the next few years.

That kind of performance has become commonplace at MercadoLibre. The only hiccup it has produced in the last few years came in the 2012 third quarter, when EPS declined 2% and the company fell a penny short of profit views.

MercadoLibre rebounded nicely in the fourth quarter, however. Earnings were 69 cents a share, up 47% from the prior year and 8 cents above consensus analyst views.

Revenue rose 20% to $103.8 million. It was the first time the company topped the $100 million mark for a full quarter, though results fell shy of estimates for $105.3 million.

Classified Ads

The number of payment transactions grew 43% for the quarter. Gross merchandise volume was $1.6 billion, up 14% in U.S. dollars. Total payment volume reached $525 million, a gain of 30% in U.S. dollars.

Meanwhile, revenue from classifieds and advertising climbed 46% in constant currencies during the fourth quarter.

"This combined growth is led by strong classified listings momentum, upgrades and better monetization than a year ago for the business unit," Chief Financial Officer Pedro Arnt said on a conference call with analysts.

For the full year, MercadoLibre grew revenue 25% and earnings 33% as the company continued to take advantage of an expanding customer base.

"The number of purchases and sales per user is increasing steadily, suggesting that buying and selling goods in an Internet marketplace is becoming more common in Latin America," JPMorgan's Baggio noted.

In 2012, he says, the average active seller performed 11 transactions per year. That was up from eight in 2006. The average buyer acquired four items in 2012 vs. three in 2006.

Analysts polled by Thomson Reuters expect MercadoLibre to log first-quarter earnings of 45 cents a share, up from 32 cents a year earlier. Full-year profit is seen rising 18% to $2.71 a share.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: EBAY , MELI

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