Expanding Logistics And Credit Services Will Drive User Engagement In Latin America's E-commerce

Key Takeaways

• Strategic logistics investments and expanding Mercado Pago credit card services boost revenue and improve user engagement, retention, and spending.
  
• Low e-commerce penetration in Latin America offers significant growth potential, with MercadoLibre poised to capture substantial market share.
  
• Expansion in credit and fulfillment may pressure margins and profitability due to costs, macroeconomic volatility, and currency fluctuations in key markets.

Catalysts

Operates online commerce platforms in the United States.

• MercadoLibre's strategic investments in logistics, including opening new fulfillment centers, are expected to improve delivery speed and reliability, potentially leading to increased GMV and revenue growth.
  
• The low e-commerce penetration in Latin America suggests significant room for future growth, positioning MercadoLibre to capture substantial market share and drive revenue.
  
• The company's aggressive expansion of Mercado Pago credit cards, with significant growth in TPV and consumer uptake, is expected to boost engagement and increase revenues and earnings through higher user retention and spending.
  
• Enhancements in credit underwriting and risk models are projected to result in profitable credit growth, potentially leading to improved net margins as earlier cohorts mature.
  
• The expansion of the MELI+ loyalty program, offering new benefits and differentiating features, aims to drive user engagement and frequency, impacting revenue growth positively over the long term.

MercadoLibre Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MercadoLibre's revenue will grow by 24.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.8% today to 11.0% in 3 years time.
• Analysts expect earnings to reach $3.9 billion (and earnings per share of $80.5) by about December 2027, up from $1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.2x on those 2027 earnings, down from 63.8x today. This future PE is greater than the current PE for the US Multiline Retail industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.99%, as per the Simply Wall St company report.

MercadoLibre Future Earnings Per Share Growth

Risks

• Expansion in credit card portfolio with accelerated underwriting might pressure net margins due to increased short-term provisions and potential risk exposure before revenue growth and profitability can catch up.
  
• Fulfillment center expansions and the associated costs could temporarily impact profitability and net margins until the centers reach optimal productivity and scale.
  
• The shift towards longer-duration loans and lower-risk customers, while potentially stabilizing the portfolio, could lead to tighter margins given the reduced spread, affecting overall earnings.
  
• Currency fluctuations, particularly in key markets like Mexico and Brazil, may negatively impact revenue growth when national currencies depreciate against the dollar, affecting earnings.
  
• Reliance on macroeconomic stability, particularly in volatile economies like Argentina, presents a risk to consistent revenue growth and profit margins, as regional economic downturns could significantly impact operations.

Valuation

• The analysts have a consensus price target of $2289.64 for MercadoLibre based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2800.0, and the most bearish reporting a price target of just $1750.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $35.8 billion, earnings will come to $3.9 billion, and it would be trading on a PE ratio of 36.2x, assuming you use a discount rate of 9.0%.
• Given the current share price of $1809.12, the analyst's price target of $2289.64 is 21.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.