Investor’s Opinion: Mercadolibre, the eBay of Latin America

Source: Seeking Alpha

When investors usually think of emerging market technology stocks, Latin America does not come to mind. However, the past and continuing performance of Argentina-based Mercadolibre (MELI) may change that.

Mercadolibre (Spanish for Free Market) is a tech company that runs the leading e-commerce website in Latin America. The company’s business model resembles eBay (EBAY) as it operates auctions and classified sales on its website while earning money through commissions and transaction fees. Mercadolibre also operates an online payment service similar to Paypal to help facilitate online payments in the region.

Its geographical presence is widespread throughout Latin America and Portugal with its biggest markets being Brazil (26% of revenues) followed by Argentina, Venezuela and Mexico. Since the company bought out competitor Deremaste.com, Mercadolibre has gained a regional monopoly in the industry. Since it has a strong strategic partnership with eBay, which includes a non-competition agreement for Latin America, eBay is not a threat.

The company has an excellent record of growth and healthy financials. Mercadolibre has no debt and has grown to the point where cash flow from operations will be able to cover any future investment costs. Profitability is also strong with a 26% profit margin and the company is utilizing its capital effectively with an off the charts 37% return on investment capital. Growth remains strong as well with an expected earnings growth rate of 35.4% over the next five years.

Similar to other emerging market investments, the main risks affiliated with investing in Mercadolibre are political. Latin American leaders have a history in intervening in their countries’ economy with either populist reforms or currency devaluations. This can hurt the credibility of third party transactions and may alter revenues adversely on a U.S. dollar basis. Also, 17% of the company’s revenue is based out of Venezuela, which does not have a foreign business friendly environment under Hugo Chavez.

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Overall, despite political risks, I believe that Mercadolibre is a good investment. Latin America has one of the highest rates of Internet penetration in the world, and Internet companies such as Mercadolibre are beneficiaries of this. With a de facto monopoly in its market, extremely strong and improving financials, and excellent growth through increasing use of e-commerce, Mercadolibre is the leading technology stock in Latin America.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

— Nicholas Pardini