Key Points
MercadoLibre's credit portfolio is both a risk factor and a massive opportunity.
The company is investing aggressively in growth initiatives.
Its fintech business is growing rapidly in Mexico, and it could still have a lot of growth ahead.
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MercadoLibre (NASDAQ: MELI) has been a nerve-racking business for its investors to follow. On one hand, revenue continues to grow rapidly, and both the e-commerce and fintech sides of the business have excellent momentum. On the other hand, profitability hasn't quite been as strong as expected recently, and investors have some serious questions about the company's growth strategy.
Of course, uncertainty is a bad thing for stocks. MercadoLibre's stock price has fallen by nearly 35% from its 52-week high. Here are the three things that could determine whether the decline is a buying opportunity or an early sign of more pain to come.
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Is the credit portfolio the next big growth driver or the biggest risk?
Perhaps the biggest question mark for investors after MercadoLibre's fourth-quarter earnings report is the credit portfolio. In simple terms, it seems to be both the biggest growth driver and the biggest risk factor, simultaneously.
On one hand, the credit portfolio grew by 90% year-over-year to $12.5 billion in outstanding balances. Nearly 3 million new credit cards were issued in the fourth quarter alone. And it's worth noting that the non-performing loan (NPL) rate is relatively low, at 4.4%. However, even with a reasonable default rate, a larger credit portfolio entails greater risk. More money will need to be set aside to cover bad debts, and a recession could have a much greater negative impact on a larger portfolio.
Plus, it's worth mentioning that MercadoLibre has reported a declining net interest margin after losses. The portfolio is shifting toward credit cards, and funding costs have increased in key markets.
To be clear, if the credit portfolio continues to grow while remaining a high-quality profit driver, it will be a big win. But that remains a big "if" at this point.
Will short-term pain pay off in the end?
MercadoLibre's margins have been under pressure recently. In the fourth quarter, the company's operating margin declined by about 300 basis points year over year.
A significant reason for this is higher operating expenses. Specifically, MercadoLibre is investing aggressively in initiatives that management hopes will deliver sustained, rapid growth. An example is lowering the free shipping threshold in Brazil. Scaling the credit card operation is also an investment designed to grow market share, but it requires considerable investment in the short term.
Management's goal with the increased investment pace is to grow. Leadership has made it clear that the company is "not trying to optimize short-term margin" right now. If these efforts eventually result in margins recovering over the long term, it could be a major win for investors, but it will take some time before we know if it is paying off.
Looking to Mexico for the next wave of growth
MercadoLibre's largest markets are Brazil and Argentina, but Mexico could be the most exciting one to watch going forward. Mexico is at an earlier stage of e-commerce penetration than Brazil, and MercadoLibre is investing heavily to build out its infrastructure and grow this part of the business.
It looks to be paying off. MercadoLibre's GMV growth rate in Mexico accelerated to 35% in the fourth quarter, from a rate of 28% a year ago. 45% more items were sold in Mexico than in the fourth quarter of last year. Acquiring volume in the fintech business in Mexico grew 50% year-over-year.
Revenue from Mexico -- especially on the financial services and credit sides of the business -- is a fraction of what MercadoLibre gets from Brazil. But this could be a major growth driver to watch over the next few years.
There's a lot more to the thesis
Of course, there's a lot more to MercadoLibre's future success (or lack thereof) than these three factors. But the credit portfolio, aggressive investment strategy, and Mexico fintech potential are the three areas where there's the most potential, but also the most uncertainty. If MercadoLibre's efforts in all three of these areas prove to be successful, it could be a massive win for investors -- but there's a lot that could go wrong as well.
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Matt Frankel, CFP has positions in MercadoLibre. The Motley Fool has positions in and recommends MercadoLibre. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
