Duncan TuckerChina’s online commerce giant Alibaba decision to file an initial public offering (IPO) sent waves across Wall Street and Silicon Valley, with analysts predicting this could be the largest technology debut in history.
China’s answer to eBay, Amazon and Paypal could surpass the US$16 billion raised by Facebook when it went public in 2012. But if Alibaba can evoke such optimism and excitement then why has the stock of its Latin American equivalent taken such a nosedive in recent months?
Founded in Buenos Aires in 1999, MercadoLibre is eBay’s Latin American partner and the region’s leading e-commerce site. It employs 1,600 people across the region and boasts some 90 million users, with operations in Argentina, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela. The e-commerce pioneer also runs Paypal-style online payment service MercadoPago and it continues to be the only NASDAQ-listed internet company from Argentina or Brazil.
Listed as MELI on NASDAQ, MercadoLibre recently posted net revenue of US$115.4 million for 2014Q1, up 12.3% from 2013Q1. However, the company stock is still recovering from a major slump, dropping by close to 40% since the end of last year.
“MercardoLibre’s stock is slumping because of the way that it accounts for its earnings in Argentina and Venezuela,” stock analyst Nicholas Pardini told Nearshore Americas. “A lot of investors are concerned that they may not be performing as well as they claim to be because of the way they reported the value of the currency.”
Argentina and Venezuela have suffered high levels of inflation in recent months and “both of those combined make up a very large percentage of MercardoLibre’s bottom line,” explained Pardini, the author of the Pardini Report and managing partner of the Nomadic Capital Partners hedge fund. “If they report those earnings in a different exchange rate before the devaluation, or one that does not factor in the black market value of that currency, then it might make the US dollar earnings look higher than they are in practice. There are fears of further devaluations of these currencies and the slowdowns in these particular countries have been driving down the stock.”
“Technology is considered the heart of MercadoLibre’s business. Each year the company spends between 5% and 7% of its income on technology investment and it has 300 IT professionals who develop all the software for the platform in-house” – MercadoLibre CTO Daniel Rabinovich
Performance Guarantees Recovery
However, MercadoLibre’s stock is expected to recover well in the long term given the company’s strong performance and enormous growth potential. The analyst consensus is that it will continue to grow by over 20% of the next five years, “mainly because MercardoLibre doesn’t really have any competition for the eBay-like services in Latin America and it is still a growing market,” Pardini said. “There’s plenty of growth opportunity” given that Latin America is a huge, young and largely untapped market for e-commerce (Forrester Research rates it as the fastest growing e-commerce market in the world) while the partnership with eBay “ensures that eBay won’t compete with them directly in Latin America,” Pardini added.
The company’s strong performance record owes much to its efficient business model and knack for innovation. “They have a track record of keeping earnings growth high and pretty strong profitability and management efficiency. Their net profit margins are reported as 28.6%,” Pardini said. The actual margin could be lower, given MercadoLibre’s currency reporting, he warned, “but it’s so still much higher than most Internet companies around the world and it has a return on investment capital of 30%. Anything above 20% is a sign of strong management efficiency within the company.”
For MercadoLibre, strong management efficiency has meant keeping most platform development in-house and acquiring talent, while outsourcing certain tasks to third parties and fostering an entire tech ecosystem based around its platform.
“Technology is considered the heart of MercadoLibre’s business. Each year the company spends between 5% and 7% of its income on technology investment and it has 300 IT professionals who develop all the software for the platform in-house in Buenos Aires and in the province of San Luis,”MercadoLibre CTO Daniel Rabinovich told Nearshore Americas.
“MercadoLibre currently has three development centers in Argentina (two in Buenos Aires and one in San Luis). In March 2013 we acquired the company Neosur, a company from Cordoba dedicated to software development, which is also now part of our development centers,” Rabinovich added.
In October 2013 MercadoLibre signed an agreement with North Carolina-based ChannelAdvisor,a leading provider of cloud-based e-commerce solutions that enable retailers and manufacturers to increase global sales by more efficiently automating and managing the online selling process across multiple channels, including third-party marketplaces, paid search and comparison shopping engines.
“We believe this partnership will increase our marketplace listings and bring new strategic clients, fully integrated with our systems,” MercadoLibre COO Stelleo Tolda said at the time. “Ultimately, our consumers will benefit through an even better buying experience.”
Creating An Ecosystem
In 2011 MercadoLibre opened a US$1 million R&D center in Silicon Valley in order to attract talent, observe the latest trends and develop innovative new software and technology. It has since focused on building an ecosystem around the company and opened its platform to third parties so as to stimulate both internal and external innovation.
The company’s open application planning interface (API) enables independent developers to create apps compatible with MercadoLibre and MercadoPago that enhance the user experience and improve operations between buyers and sellers. To this end MercadoLibre also launched annual Developers Conferences in Argentina and Brazil in 2013.
“These conferences are intended to create a space where developers, startups and MercadoLibre vendors can unite,” Rabinovich said. “We want the big sellers to become familiar with the solutions that can enable them to maximize their business, while the developers can participate in technical talks, API demonstrations, and find out about all the possibilities to create integrated apps for the MercadoLibre ecosystem.”
In March 2013 MercadoLibre also launched a US$10 million Commerce Fund to support startups with the potential to capitalize on its API. The fund will favor early-stage startups with high potential that are developing apps or technologies based on the MercadoLibre platform. The aim is to promote and drive developments that will contribute to the adoption of e-commerce in Latin America, while specifically enhancing the MercadoLibre ecosystem.
“We know Latin America’s ability in terms of resources and technological enterprises, we want to promote and foster development that contributes to the growth of our platform and e-commerce in the region,” Rabinovich explained.
If successful, this approach will ensure that MercadoLibre remains the dominant force in the region’s fast-expanding online commerce market.
There are a couple of items worth noting. In regards to EBay, they are not a partner of MELI, but rather a company that made a small (relative to eBay’s size) investment in the company. In fact the exclusivity rights agreement the two companies had ended in 2006 and was never renewed. This means eBay can jump into the market on a much larger scale at a time they see as opportune.
As far as earnings and margins are concerned, the currency issues in Venezuela and Argentina don’t only affect their misrepreorting of earnings, but also mean the company will have to report large “one time that’s not really one time” losses that are far larger than ones recently reported shortly after earnings release. Between Argentina and Venezuela, it represents nearly 40% of MELI’s revenues and 70% of their growth. This only confirms that current margins are not as high as recently stated by company, and that near future is nowhere near as bright.