Key Points
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MercadoLibre’s revenue grew 45% to $10.75 billion, but earnings came in below expectations.
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The miss was driven by investments in fulfillment capacity, free shipping and marketing, which management expects to pay off.
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Credit quality held steady even as the lending portfolio grew 62%.
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Shares of MercadoLibre (NASDAQ:MELI) fell by 12% on Nov. 5, the day after the company’s third-quarter earnings came in below analysts’ expectations. That leaves the stock more than 40% below its all-time high. Of course, some of it was due to broader market pressure, as the Nasdaq Composite had its worst day in years, but there were also numbers in the company’s results that drove the decline. MercadoLibre is one of the largest investments in my own portfolio, so naturally, I’m not thrilled about the drop. But I’m not planning to sell a single share.
Another quarter of rapid growth
MercadoLibre’s revenue grew 45% year over year to $10.75 billion, or 41% on a currency-neutral basis, slightly ahead of analysts’ estimates. Its commerce business grew revenue 47%, and its fintech business grew 42%.
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The underlying metrics were strong, too. Gross merchandise volume (GMV), the total value of goods sold on its marketplace, rose 33% on a currency-neutral basis. Total payment volume through Mercado Pago grew 53% to $109 billion, and the fintech platform now has about 93 million monthly active users, up 29% from a year ago.
So why did the stock fall?
In a nutshell, the problem was profitability. MercadoLibre earned $8.83 per share in the third quarter, below the roughly $9.30 analysts expected, and its operating margin shrank to 6.3% from 9.8% a year earlier.
Based on that, you might be wondering whether something is going wrong with the business, but I don’t see any massive red flags. MercadoLibre increased its fulfillment capacity by almost 20% from the second quarter, offered free shipping on more orders, and increased marketing spending in Brazil. As CFO Martín de los Santos explained on the call, “The quarter when you are building capacity, you don’t have the revenues yet, so you have the cost.” He also said he expects margins to recover next quarter.
But the two biggest reasons MercadoLibre’s operating margin fell year-over-year were higher operating costs and bad debts from the rapidly growing credit portfolio.
The lending business looks healthy
Speaking of the credit portfolio, it’s also worth noting that side of the business held up. MercadoLibre’s loan portfolio grew 62% to $17.9 billion, and the rate of loans 15 to 90 days past due was 7%, roughly unchanged from the prior quarter and close to historical lows, according to management. Management also said it’s being a bit more conservative with new loans in Brazil and Argentina, which I like to see when a loan book is growing this quickly. There were higher rates of bad debt, but that’s a function of the rapid growth of the credit portfolio, not of deteriorating credit quality.
Why I’m not planning to sell
I own MercadoLibre because it’s the dominant e-commerce and fintech platform in Latin America, it’s still growing far faster than most large companies, and its logistics network would be very difficult for a competitor to replicate. Nothing in this report changes any of that. In fact, the biggest reason profits came in light is that the company is widening that logistics advantage. After the drop, the stock trades for less than 40 times forward earnings, well below its five-year average of about 63 times. Source
To be sure, there are risks. If free shipping and heavier marketing turn out to be permanent costs rather than investments, margins could remain lower for longer. And a lending portfolio growing 62% a year would be the first place to show stress if Latin American consumers hit a rough patch. I’ll be watching both closely, especially whether margins recover next quarter as management expects.
Having said all that, a company growing revenue 45% doesn’t become less valuable because it chose to spend more in one quarter. If anything, I’m more likely to add to my position than to sell.
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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.
