MercadoLibre (NASDAQ:MELI) Beats Expectations in Strong Q2, Shows User Growth

Full Report / August 02, 2023

Latin American e-commerce company MercadoLibre (NASDAQ:MELI) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue up 31.5% year on year to $3.42 billion. MercadoLibre made a GAAP profit of $262 million, improving from its profit of $123 million in the same quarter last year.

MercadoLibre (MELI) Q2 FY2023 Highlights:

  • Revenue: $3.42 billion vs analyst estimates of $3.27 billion (4.4% beat)
  • EPS: $5.16 vs analyst estimates of $4.28 (20.5% beat)
  • Free Cash Flow of $1.3 billion, up 68.6% from the previous quarter
  • Gross Margin (GAAP): 50.4%, up from 49.4% in the same quarter last year
  • Unique Active Users: 109 million, up 25 million year on year

Originally started as an online auction platform, MercadoLibre (NASDAQ:MELI) today is a one-stop e-commerce marketplace in Latin America.

The company connects buyers and sellers in the majority of countries across the continent. MercadoLibre allows buyers to browse and purchase products ranging from furniture to groceries, while sellers can list products and access tools to manage online stores. The company also offers payment and shipping solutions, as well as financial services such as loans through subsidiary MercadoPago.

MercadoLibre addresses the lack of a reliable and convenient e-commerce platform in Latin America. Before MercadoLibre, consumers in the region had to rely on traditional stores or informal markets to purchase goods, which often meant time spent going from one physical location to another, limited options, and sometimes uncompetitive prices. Sellers could only reach buyers who were close enough to physically visit their store or stand. MercadoLibre therefore provides a convenient and trusted way for consumers to shop online, while also allowing sellers to reach a wider audience.

MercadoLibre generates revenue primarily through commissions on transactions, as the company holds no inventory. For example, when a seller makes a sale, MercadoLibre charges a commission ranging from mid-single-digits percentages to mid-teens percentages, depending on the category and sales volume. Advertising and its fintech services are additional sources of revenue.

Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission paying sellers, generating flywheel scale effects which feed back into further customer acquisition.

Competitors in offering e-commerce platforms include Amazon.com (NASDAQ:AMZN), Alibaba (NYSE:BABA), and eBay (NASDAQ:EBAY).

Sales Growth

MercadoLibre's revenue growth over the last three years has been incredible, averaging 65.2% annually. This quarter, MercadoLibre beat analysts' estimates and reported solid 31.5% year-on-year revenue growth.

MercadoLibre Total Revenue

Ahead of the earnings results, analysts covering the company were projecting sales to grow 22.1% over the next 12 months.

Usage Growth

As an online marketplace, MercadoLibre generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

Over the last two years, MercadoLibre's daily active users, a key performance metric for the company, grew 15.7% annually to 109 million. This is solid growth for a consumer internet company.

MercadoLibre Unique Active Users

In Q2, MercadoLibre added 25 million daily active users, translating into 29.8% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like MercadoLibre because it measures how much the company earns in transaction fees from each user. Furthermore, ARPU gives us unique insights as it's a function of a user's average order size and MercadoLibre's take rate, or "cut", on each order.MercadoLibre ARPU

MercadoLibre's ARPU growth has been exceptional over the last two years, averaging 30.3%. The company's ability to increase prices while growing its daily active users demonstrates its platform's value, as its users are spending significantly more than last year. This quarter, ARPU grew 1.34% year on year to $31.33 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. MercadoLibre's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 50.4% this quarter, up 0.9 percentage points year on year.

For online marketplaces like MercadoLibre, these aforementioned costs typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification. After paying for these expenses, MercadoLibre had $0.50 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.

MercadoLibre Gross Margin (GAAP)

MercadoLibre's gross margins have been trending up over the last year, averaging 56.5%. These margins are around that of a typical consumer internet business, but MercadoLibre's rising margins may indicate improving pricing power or scale advantages over costs.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like MercadoLibre grow from a combination of product virality, paid advertisement, and incentives.

MercadoLibre is very efficient at acquiring new users, spending only 22.2% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a strong brand reputation and customer acquisition advantages from scale, giving MercadoLibre the freedom to invest its resources into new growth initiatives while maintaining optionality.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

MercadoLibre reported EBITDA of $686 million this quarter, resulting in a 20.1% margin. Furthermore, MercadoLibre has shown strong profitability over the last four quarters, with average EBITDA margins of 17.2%.

MercadoLibre Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. MercadoLibre's free cash flow came in at $1.3 billion in Q2, up 60.6% year on year.

MercadoLibre Free Cash Flow

MercadoLibre has generated $4.12 billion in free cash flow over the last 12 months, an eye-popping 33.5% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from MercadoLibre's Q2 Results

With a market capitalization of $60.8 billion, a $4.7 billion cash balance, and positive free cash flow over the last 12 months, we're confident that MercadoLibre has the resources needed to pursue a high-growth business strategy.

We enjoyed seeing MercadoLibre's strong user growth this quarter. We were also excited that its revenue growth outperformed Wall Street's expectations. ARPU is stable and free cash flow is increasing. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The stock is up 4.26% after reporting and currently trades at $1,215.02 per share.

Is Now The Time?

When considering an investment in MercadoLibre, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. There are numerous reasons why we think MercadoLibre is one of the best consumer internet companies out there. While we'd expect growth rates to moderate from here, its revenue growth has been exceptional over the last three years. On top of that, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits and its top-tier ARPU growth shows the increasing value of its platform to its users.

At the moment MercadoLibre trades at 26.1x next 12 months EV/EBITDA. Looking at the consumer internet landscape today, MercadoLibre's qualities really stand out, and we really like it at this price.

Wall Street analysts covering the company had a one year price target of $1,523.9 per share right before these results, implying that they saw upside in buying MercadoLibre even in the short term.

To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.