Mercado Libre, Inc. (NASDAQ: MELI) is the largest online commerce ecosystem in Latin America based on unique visitors and page views.
1. Gross Merchandise Value and Annual Active Customers
Two of the key operating metrics that investors should look at when assessing Mercado Libre’s business performance is the company’s Gross Merchandise Volume (“GMV”) and Annual Active Customers (“AAC”).
GMV is the total value of merchandise sold and is often used to determine the health of an e-commerce firm’s business because its revenue is a function of gross merchandise sold and fees charged.
In 2021 3Q, Mercado Libre’sGMV grew from $5.9 billion to $7.3 billion, representing an increase of 23.9% in USD and 29.7% on an FX neutral basis.
The growth in GMV has slowed down drastically from 117% in Q3 2021 to 30% in Q3 2021. GMV growth also slowed down across all the countries in which it operates.
The slowdown could be attributed to the gradual reopening of the economy. However, a 30% increase on top of 117% increase in GMV is still quite impressive, even for a fast-growing company.
Unique active users also doubled from 112.5 million from the previous year to 224.5 million in the nine-month period ending September 2021.
Mercado Libre also provides fintech services through Mercado Pago, which is an essential component to its business. The integrated digital payments system helps enhance the user experience for both buyers and sellers on the platform.
Total payment volume (“TPV”) through Mercado Pago almost topped $20.9 billion, a year- over-year increase of 43.9% in USD and 59.0% on an FX neutral basis.
With the healthy increase in GMV and TPV, net revenues naturally showed an increase too.
Net revenues for the third quarter were $1.9 billion, a year-over-year increase of 66.5% in USD and 72.9% on an FX neutral basis.
Commerce revenues increased 69.0% year-over-year in USD reaching $1.2 billion, while Fintech revenues increased 61.7% year-over-year in USD reaching $632.8 million.
3. Operating income
Income from operations was $160.4 million, compared to $83.1 million in the prior year. As a percentage of revenues, income from operations was 8.6%. This is an increase from the 7.4% operating margin in the prior year’s quarter.
4. Net income
Net income before income tax expense was $126.1 million, a 139.5% increase from the $52.7 million in 3Q 2020.
Net income after income tax in Q3 reached over $95 million at a margin of 5.1%. After correcting for savings that are non-recurring in nature, net income margin would have been closer to 2% for the quarter.
This is an improvement from the margin of 1.35% in Q3 of the previous year quarter.
Both increases in operating and net income margins demonstrate that Mercado Libre is becoming more profitable. Margins are likely to continue improving as revenues and profits grow.
5. Greater assortment of products on marketplaces
The e-commerce firm attributes the rise in GMV to the addition of more well-recognized brands to its marketplaces. For example, in the last few months, items from Nike, Enjoei, Nivea and PlayStation can be found in Mercado Libre’s marketplace in Brazil, as well as Apple, Samsung and Asics that have been added to its platform in Mexico.
6. Improved fulfilment capabilities
Through Mercado Envíos, Mercado Libre facilitates the shipping of goods from sellers to buyers.
By allowing sellers to provide a quality customer experience from purchase to delivery, Mercado Envios adds immense value to Mercado Libre’s ecosystem.
Mercado Libre has continued to develop more capabilities to expand fulfilment in their key geographies.
Its managed network penetration reached 86%, up from 64% in the same quarter last year, enabling delivery times to improve every quarter
In Q3, almost 80% of all items were delivered within 48 hours.
I am glad that Mercado Libre continues to invest in its fulfilment capabilities, which is crucial in providing a good user experience. This helps Mercado Libre to avoid losing customers and market share to fierce competitors like Amazon.
7. Emerging concern
While I am satisfied with Mercado Libre ’s financial results for the previous quarter, certain changes in its balance sheet have caught my attention as well.
In 2021, Mercado Libre has been taking on much more debt, without an accompanying increase in cash. As of 30 September 2021, total debt ($3.1 billion) far exceeds total cash ($1.3 billion).
Other ratios that are used to assess a company’s financial health such as debt to equity and interest coverage ratio also serve as warning signs to Mercado Libre ’s financial health.
It’s debt to equity ratio stands at 25.42, which is an astonishingly high number, and interest coverage ratio at 1.9, which is hardly adequate.
However, Mercado Libre has recently raised $1.55 billion from the equity market, which the company said would be used for “general corporate purposes.” The additional equity raise should pare down its debt considerably.
I am still a little concerned about how much debt Mercado Libre has been taking on recently. So I will continue to look for any noticeable changes in its balance sheet.
Mercado Libre has been showing an impressive growth record the past few years. It also had impressive results to show for the last quarter, and a clear direction as to where the business is progressing towards.
I am happy to see that apart from growing its top line, Mercado Libre is gradually becoming more profitable given that its initial investments into growing the business are now bearing fruit.
Similar to Amazon and Alibaba, Mercado Libre has a robust ecosystem consisting of e-commerce, logistics and digital payment infrastructure. An added advantage Mercado Libre has would be the fast-growing e-commerce and digital payment industries in Latin America.