E-commerce companies have been the biggest beneficiary of the COVID-19 times. The brick and mortar retail stores are ailing but digital stores are flourishing. One company leading the e-commerce space in Latin America is MercadoLibre (NASDAQ: MELI) that has outperformed retail peers and crushed broader index returns including the S&P 500. The stock bottomed out in March and gained close to 150% in the past six months.
MercadoLibre has also made a strong name in digital payments. It's online payment service Mercado Pago is the preferred choice of payment not only on its portal but other platforms as well.
The payment service is likely to make its presence felt on physical storefronts too, in the upcoming decade. As the world is moving towards contactless deliveries and payment, MercadoLibre's leadership in the fintech segment is a major driver for the stock.
Robust financial results underpin its growth
The e-commerce giant's second-quarter results reflected it's operational efficiency. In local currency terms, its net revenue surged 123% YoY. Its on-platform payments soared 111%, while off-platform payments jumped over 175%. It's noteworthy that Mercado Pago is more popular outside its own portal.
The company’s' bottom line highlights its growth, particularly during the coronavirus crisis. MELI’s net income expanded to $56 million in Q2 compared to a mere $16 million in the same period last year.
E-commerce and Fintech are in infancy in Latin America
What is mainly playing in favor of MercadoLibre is the fact that Latin America is yet to see the robust rate of digital penetration as experienced in the U.S. E-commerce is still in a nascent stage in the region. According to payment service provider, Visa (NYSE:V), close to 13 million people made their first online purchase in the March quarter in Latin America.
Compared to the 11% penetration in the U.S., the presence of e-commerce in the Latin American retail market is only 4%. Moreover, most transactions in Latin America are cash-based. Not everyone in the region has access to a bank account or digital money. However, the current situation calls for digitization in all dealings.
Growing competitive forces pose a challenge
While all seems to be looking good for MercadoLibre, it has some challenges to surmount in the times to come. The biggest one is fierce competition from larger players. Sensing the immense opportunity in the region, retail giants, Amazon, and China-based, Alibaba are making their presence felt in Latin America.
Amazon has begun offering its Prime services in Brazil since 2019. Besides free shipping, customers would get free access to Prime Videos as well as books, movies, CDs, etc.
Similarly, Alibaba's B2C arm, AliExpress, is also looking to increase investments in the Latin American market, especially Brazil.
MercadoLibre to maintain momentum in the long-run
While these developments can pressurize MercadoLibre over the short-term, the long-term impact may not be as significant. The Argentina-based giant is not just an e-commerce player, but an ecosystem. Along with Mercado Pago, the company is leading buyers into a new world of streamlined digital services.
Driven by its stellar gain in stock price, MercadoLibre is valued at a forward price to sales multiple of 19. However, given its stellar growth prospects, the stock commands a premium valuation.
MercadoLibre is one of the most sought-after growth stocks in recent times and is likely to maintain the momentum for the rest of 2020. Moreover, the COVID-19 situation will only act as a catalyst to fuel its bull run further.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
