While I didn’t quite expect that opportunity would knock so soon, in MercadoLibre’s (MELI) case, it has in very short order. In a little over four months, MELI’s share price has once again fallen below $500. However, the circumstances of its most recent share price fall come in the midst of a likely global recession that may have a particular impact in MELI’s core Latin American market. On March 17, MELI’s share price touched $425 per share, a level last seen in early 2019. The dynamics of MELI’s current share price fall come in an environment which may certainly create some short-term pain for MercadoLibre, however, it may set the stage for longer-term gain.
Core commerce platform should experience strength
As Latin America’s preeminent digital commerce platform, MercadoLibre has over 75% of Latin American Internet-enabled users as registered users on its platform and has a registered user base of over 300M. With an increasing environment of self-quarantine and border lockdowns across Latin America, there will be a natural desire for consumers to avoid going to shop in store and increasingly look to transact purchases online.
With MELI being the preeminent platform in Latin America for commerce, it’s natural that consumers will look to meet the need for necessary purchases on the MercadoLibre platform. MercadoLibre should likely benefit from the ongoing coronavirus swirl that is sweeping the globe in a couple of significant ways as far as its e-commerce business is concerned.
In the first instance, the coronavirus epidemic will likely accelerate user behavior to transact online versus in store, thus resulting in a higher number of users who are more engaged even after the epidemic comes to its natural conclusion. Of course, this is reliant on the user experience being satisfactory during this time, with timely delivery and a suitable inventory of stock.
Additionally, MELI should also be a beneficiary of an enhanced network effect, which should serve to cement its already strong dominance in the region. During times like this, existing consumers and merchants tend to gravitate to the platform with the highest likelihood of being able to satisfy most of their needs and wants.
This may help MELI to really put the dagger into emerging competitive platforms in the region such as Amazon (AMZN) and eBay (EBAY), which, currently, are fairly distant in terms of a number of site visits and yet, are still competitors to some degree, nonetheless. Competitive efforts to ramp up and accelerate presence in these markets will also take a hit during this period, with supply chain disruption and an inability to source products and to secure needed labor, warehouse space, and other resources. MELI really has the opportunity to further press its advantage over the next 3 to 6 months in its home markets.
Of course, MELI won’t be without its own challenges over this next period. The economies of Latin America and consumers in the region have already been under some considerable duress over the last several years, dealing with hyperinflation in Argentina and high unemployment in Brazil.
A more pronounced decline in economic growth may really have consumers in the region reeling to some extent which may impact discretionary spending on the MELI platform. While MELI will see a shift in potential transactions in clothing and food and other essentials purchases to its platform, categories of high-end discretionary consumption including vehicle-related categories and high-end discretionary equipment such as computing and home appliances may see some category reductions as consumers become more cautious.
Payments business may take a hit
I’ve increasingly been a fan of MELI’s payments business which has experienced rapid growth over the last few years. This was the significant reason behind which PayPal (PYPL) made a sizable investment of almost $750M in MercadoLibre in early 2019, on the back of which both businesses have done significant work in integration to facilitate such things as cross-border payments and PayPal merchant check out through the MercadoPago platform. While MELI’s payment business now transacts over $7.5B in quarterly payment volume, MELI now does more off-platform volume versus on platform volume.
While much of this off-platform volume is on other digital properties, MELI has been increasingly making headway in in-store, point-of-sale digital payments which are really where there is a far larger, more significant long-term opportunity for the business. The business has recently onboarded marquee MercadoPago partners such as Starbucks (SBUX), 7-Eleven, and McDonald’s (MCD). It’s highly likely that this portion of the business will take a near-term hit for the duration of the coronavirus epidemic as consumers refrain from transacting in store. However, ultimately, I see this as a minor stumble for MELI, rather than something that is likely to significantly derail the long-term potential of this business. In the interim, MercadoPago will continue to benefit from payment processing volume picked up on other non-MercadoLibre digital properties.
Finally, a more favorable price
MercadoLibre has always been a high-quality business, in my opinion; however, it’s been largely trading at an exuberant, elevated price for much of the last few years. In the mid $400 range, MELI is finally trading at a price which it last traded in early 2019. While the worst of the share price damage may still have not been seen yet, for the long term, growth-oriented investors, MercadoLibre, finally, bears some consideration for initial entry. I will be continuing to hold my position in this great business in spite of near-term turmoil.
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Disclosure: I am/we are long MELI, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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