MercadoLibre Earnings: Solid Quarter As Argentina Pressure Offset by Strength in Brazil and Mexico

The bar must be set pretty high when 31% sales growth and 960 basis points of operating margin expansion constitute “meeting” expectations, but that’s largely the world we live in for Latin America’s largest e-commerce operator. Wide-moat MercadoLibre MELI continues to generate outsize growth despite a challenging backdrop, growing its gross merchandise volume by 12%, 24%, and 52% in Argentina, Brazil, and Mexico (in U.S. dollars), respectively, during its second quarter, taking share in each market and incrementally growing its fulfillment penetration, to 46%. While the firm narrowly missed our expectations going into the quarter, with $3.42 billion in sales and $5.16 in diluted EPS falling just shy of our $3.49 billion and $5.55 estimates, respectively (attributable to an unusually large $182-million foreign-exchange loss in Argentina), we’re encouraged by both margin expansion and strong results in Brazil and Mexico. On balance, a slight miss on quarterly sales and earnings is offset by time value, and we expect to make few changes to our $1,250 intrinsic valuation.

While the Argentine business remains pressured, Mexico and Brazil generated meaningfully positive momentum, together comprising 64% of MercadoLibre’s contribution profit (up 6 points annually). Results are particularly encouraging given the firm’s (proportionately) less entrenched competitive position in those markets, and an emphasis on the Mexican fintech business should further ossify gains. We continue to pencil in outsize cumulative annual growth in sales (26.5%) and operating profit (40%) over the next five years for the marketplace operator, reflective of the firm’s deeply entrenched position with regional merchants and consumers. Its 109 million quarterly active users across online properties represent a striking 18% of the Latin American population, by our calculations and World Population Review data, highlighting its commanding position in the Latin American digital commerce ecosystem.