Bloomberg Línea — Mercado Libre (MELI) reported its second-quarter results on Wednesday in after-market hours that revealed net income of $261.9 million, equivalent to $5.22 per share, above the consensus of forecasts compiled by Bloomberg, which pointed to $4.31 per share.
According to Bloomberg data, the company’s adjusted earnings per share have beaten estimates in nine of the last 12 quarters.
The leading e-commerce company in Latin America had total revenue of $3.4 billion in the period, up 57.3% from the second quarter of 2022, while the Bloomberg consensus estimated net revenue of $3.3 billion.
Share prices were up more than 5.30% at close to 19:00 hrs ET after the results announcement. Mercado Libre shares have risen about 40% this year, in line with the Nasdaq 100.
According to the company, revenue was driven by an increase of 8.1 million new users. Mercado Libre also said it achieved operating income of $558 million, up 123.7% in dollar terms, and an operating margin of 16.3%, with contribution from all geographies and businesses, especially Brazil and Mexico.
Impact of tax exemption
Bank of America (BAC) analysts pointed out that the new tax exemption rules in Brazil for imported products could pose a challenge for e-commerce operations in the country, as Mercado Livre competes with platforms that import tax-free products.
Richard Cathcart, director of investor relations at Mercado Livre, the Brazilian side of the e-commerce giant, told Bloomberg Línea that he is in favor of the government’s proposed Remessa Conforme structure, which allows an exemption of import tax on purchases of up to $50 on international websites, which, Cathcart says, “begins to bring a little more organization in this segment of the market”, but that the company “still has some reservations”.
He said one of the caveats refers to the reduction of the import tax rate.
“We have some difficulties to understand, but I think one of the interesting points here is that the door was already open for many of these platforms,” he said.
This, however, did not prevent sales growth in categories that suffer direct competition with imported goods.
“Over the past four quarters, our clothing category in Brazil has grown at a very good pace, well aligned with the growth of total volume of goods transacted on the platform as a whole,” he said, adding that Mercado Livre has the tools and competitive advantages to compete with such platforms.
Still, he said the company may decide to import goods from abroad to maintain competitiveness.
“We will evaluate our adherence to Remessa Conforme,” he said.
The total volume of payments processed by Mercado Pago exceeded $42 billion during the quarter, while cash generation was $3.8 billion. Net revenue grew 31% and operating profit was a record $558 million.
“This performance was driven by all countries and all businesses, but a big highlight was Mexico, where profit was almost three times higher, and also Brazil, where profit grew 77% year-on-year,” Cathcart said.
Sales volume on the marketplace also surpassed the $10 billion mark for the first time, driven by growth in several sectors, including payments and credit.
Mercado Pago surpassed 45.3 million active users, up 18.3% - in the last 12 months alone, more than 7.1 million new users were added.
The consensus had a company revenue estimate of $1.51 billion and the result was $1.5 billion, with growth of 48.4% in local currency.
In Brazil, the direct selling business saw a margin improvement and growth of 59%.
Digital advertising services, led by Mercado Ads, enjoyed revenue growth for the fifth consecutive quarter and corresponded to 1.6% of the GMV of the marketplace operation, while in the previous quarter it represented 1.4%.
“Advertising revenue grew by over 70%,” Cathcart said.
The consensus of analysts polled by Bloomberg expected the company’s e-commerce revenues to be $1.77 billion, and they were $1.9 billion, up 64.8% year on year, and which was a result of sales volume growth in the period, when total unique shoppers reached 76.6 million.
The macro scenario
Asked about expectations for the interest rate cut in Brazil, Cathcart said the decision does not impact the strategy in the country, citing that Mercado Libre has delivered results over the past few quarters, even with the basic interest rate already at a high level.
But the currency volatility in Argentina remains a challenge, he said.
According to Bloomberg News, traders are starting to make tentative moves back into Argentine stocks, looking for a possible change of government after the October elections. Some analysts are starting to recommend shares of US-listed Latin American companies with operations in Argentina, such as Mercado Libre, which could benefit.
According to Cathcart, the strategy in Argentina is to focus on the long term.
“We will have to see the outcome of the election to have a view on possible changes to the exchange rate regime in Argentina. It doesn’t change in the short term,” he said.
According to analysts at JPMorgan, only a sharper devaluation of the Argentine peso could impact the earnings per share of the company.
“In our estimate we simulated the effect of a 100% devaluation on the first half results. Our estimate is that this would have had a more or less neutral, even slightly positive impact on our net income,” he said.
“In Argentina, we’re seeing a little bit low demand in marketplace e-commerce with the pressures on consumers’ pockets, but at the same time, in this environment, they’re increasing demand for simple financial services, which help the consumer not to lose so much money to inflation,” he said.
“We have an interest-bearing account in Argentina, which pays an interest rate of 80% a year.”
In the second quarter, the number of people using that account rose 80%, he said.
The company has also been exploring other verticals: in Mexico, Mercado Libre is operating pharmacies on a small scale. In Brazil, this would not be possible because of regulations, according to Cathcart.
“But in Brazil, we still have the supermarket category as a vertical, which, in the long run, could be something much bigger in size than it is today.”
Mexico, already the second-largest market by items sold since the end of 2020, overtook Argentina as the second-largest market by sales volume in the second quarter. The country also had the highest growth in volume of products sold in the region.
The cost of funding varies according to the interest rate in different markets: so in Brazil and Mexico the cost has not risen compared to other periods, but in Argentina it has.
According to Cathcart, interest rates in Argentina are priced to follow this movement and, for Cathcart, the levels of the credit portfolio are “healthy”.
“The profitability of the credit portfolio has been good and the contribution over the credit portfolio rose from $100 million last year to $150 million. That is, it was $150 million of the total $558 million operating profit,” he said, while the loan portfolio grew by more than 21% in Latin America to US$3.3 billion.
Cathcart also said that the most recent crop of credit cards in Brazil in recent months “has been performing very well,” to the point that the company increased new card issuance in the second quarter and launched a credit card in Mexico at the end of the first quarter.
“We are increasing little by little, both in Brazil and Mexico.”
In Argentina, Mercado Libre is not considering launching a credit card, as it offers a credit line and QR Code payments.
Regarding advances in artificial intelligence, Cathcart said the company has been using this technology for a few years now and will continue to invest in this area to increase the productivity of its developers and improve the user experience. Engineers have access to GitHub’s CoPilot tool to increase productivity by checking in code.