Hi 👋
The first post about Meli was on Jan 29th. A lot has happened since then. I had a draft 80% done. The original idea was to post it before Nu’s coming out.
After going through it a few times, I thought the best decision was to halt it and begin from scratch. I had pretty cool tables and a valuation model, but it was too complicated.
After years in the financial industry, you get used to writing very long and hard-to-read paragraphs, expecting to summarize a topic, when actually nobody reads that crap.
It’s unbelievable how analysts can come up with 35 pages length report, 6 lines of paragraphs, and tons of charts that could be summarized in a dozen bullet points.
I’m not doing that. The people who can add the most value to learning, in general, are the people who can kind of decipher the complicated research and explain it to anyone.
So, let’s do it step-by-step. To understand why I’m ridiculously optimistic about MELI 0.00%↑ , there are several topics we have to return to again and again. We make sure to move from one to another to keep the content fresh.
What’s definitely true, and I’ve heard this from other writers, too, is that when you sit down and try to force yourself to think about a topic, you’re never going to get it.
If you sit down and say, “Okay, I need to think about something; what am I going to write,” it won't work if you try to force your brain into that. Believe me, I tried that quite hard.
Where I think, and I’ve heard this from other writers, too, I think you get your best ideas just randomly. You’re walking the dog. You’re on Twitter shit posting — and only God knows how much I do it. You’re just zoning off, and then it’s like, pop, you get an idea in your head.
You’re like, “Oh, I got to go to my computer right now and write this.” I collected the data a few weeks ago for this topic, but only this Thursday did I have my “pop” moment and start writing.
👉Good News✨
I’m writing the post about the POS machines we bought in February. I had to cover the essential topics. So, I went over a few hundred tests and am now good to move on to writing. Good stuff coming up next.
The outline
E-Commerce at a Glance
Superior Economies of Scale
Economic Headwind Is Not a Concern
Shopee Threat
Meli’s Unit Economics
One-Pager
Skip it if you pretend to read the entire post (20 pages)
LatAm eCommerce is a US$102bn market; supported by our proprietary industry model, we forecast growth to US$250bn in 2026. In 2021, eCommerce volumes represented 13% of overall retail sales in LatAm (excluding autos, restaurants, and services).
While stay-at-home trends were a driver of outsized growth in 2019-21, we see a stronger-for-longer setup of a double-digit CAGR through 2026; we believe the Covid-driven bump will not flatten the future eCommerce penetration curve.
Looking at 2021-26E, we forecast a 19% CAGR, with ~100bps of annual penetration gains, while the percentage growth rate is below pre-Covid levels, partly due to the more extensive base, penetration gains are more in-line with pre-2019 levels.
In Brazil, logistics improvements have unlocked new categories, with companies including Magazine Luiza (“Magalu,” “MGLU”), Americanas (“AMER”), and Via (“VIIA”) investing in omnichannel logistics. At the same time, Meli continues its marketplace fulfillment center roll-out.
Our industry model illustrates Meli's leading share across LatAm eCommerce; the backdrop in Brazil is competitive, while other countries are more fragmented. As a result, we see Meli leading with ~30% eCommerce market share in Brazil. Local operators Americanas, Magalu, and Via command a combined ~49%, and Shopee (owned by Sea Ltd) has been gaining ground (~6% 2021 share). We see Meli and Shopee as best positioned to gain share in Brazil, supported by favorable category mixes, including fewer electronics exposure.
We see a mixed top-down backdrop for LatAm Retail into 2022, balancing physical store normalization with pressure from high inflation; on eCommerce, we remain bullish and forecast +21.5% USD growth.
Despite this muted top-down backdrop, we remain bullish on eCommerce growth in the year ahead — low penetration is critical, ending 2021 at just 13.1% of retail sales across the region.
From an eCommerce perspective, electronics/appliances/video games/media products account for ~15% of the Brazilian retail market but for ~50% of eCommerce GMV (versus 17%-25% in countries like the UK, China, and the US).
In 2021, according to our estimates, the low recurrency GMV mix (including appliances and accessories) at 84% for Via, 71% for Magalu, 49% for Americanas, and 29% for Meli.
While Meli has been diversifying away from the category — a company fact sheet shows 33% electronics mix in 2021, down from 65% in 2009 – the broadening initiatives for other platforms are earlier-stage in comparison.
Our base case forecasts imply Shopee gains continued traction within the lower-ticket categories and younger / lower-income demographics where the company currently over-indexes, while logistics and fintech development remain barriers to a pivot to higher-ticket categories.
After almost a dozen industry channel checks, we have enough confidence to estimate the marginal capital invested and, therefore, the ROIC for mature cohorts.
Finally, it’s worth mentioning that Meli historically invested all its cash generated in the marketplace business to acquire customers and new ventures, leading unaware investors to believe that Meli operates an inferior business.
E-Commerce at a Glance
LatAm eCommerce is a US$102bn market; supported by our proprietary industry model, we forecast growth to US$250bn in 2026. In 2021, eCommerce volumes represented 13% of overall retail sales in LatAm (excluding autos, restaurants, and services).
While this was up notably from 5.9% in 2019, the secular shift toward online retail had been in place well before the Covid-driven acceleration.
Supported by our bottom-up company estimates – and supported by the top-down consensus expectations, we build to a cumulative US$250bn market opportunity by 2026, representing a 19% 5-year CAGR and a US$145bn incremental GMV opportunity.
While stay-at-home trends were a driver of outsized growth in 2019-21, we see a stronger-for-longer setup of a double-digit CAGR through 2026; we believe the Covid-driven bump will not flatten the future eCommerce penetration curve.
As shown in the image below, between 2015 and 2019, LatAm eCommerce volumes increased at an 18% CAGR, with ~68bps of average penetration gains annually.
Considering initial Covid impacts in 2020 and subsequent Covid-wave disruptions throughout 2021, growth accelerated to a 51% 2019-21 CAGR (69% in 2020, 35% in 2021); annual penetration gains were ~360bps over these two years.
Looking to 2021 figures, parts of the world had not fully normalized/reopened, likely benefiting the eCommerce channel. However, we also see structural and behavioral change, given the persistence of growth in 2021 on a historically tricky comparison.
Looking at 2021-26E, we forecast a 19% CAGR, with ~100bps of annual penetration gains, while the percentage growth rate is below pre-Covid levels, partly due to the more extensive base, penetration gains are more in-line with pre-2019 levels.
This is consistent with our view of a step-change in eCommerce demand, supporting the go-forward penetration curve.
Further supporting our multiyear growth thesis, we highlight a trend of broad-based eCommerce gains even for the highest penetration countries and categories.
Comparative eCommerce penetration over sales by merchandise category is shown in the image below; these charts demonstrate the broad-based gains for online retail.
This depth and breadth support our conviction in a stronger-for-longer eCommerce growth outlook, even though we couldn’t estimate the penetration per category for LatAm.
Also, on a relative basis, forecast growth rates are higher for lower-penetrated regions (e.g., LatAm, ASEAN, Africa) and categories (e.g., grocery, personal care).
While there are headwinds (logistics and otherwise) in certain countries and verticals, we believe these barriers continue to come down; encouragingly, across the LatAm countries, we have yet to see a ceiling for eCommerce penetration.
At the country level, we estimate, on average, a five-year path from 12.5% to ~16.5% eCommerce penetration, supporting growth forecasts for markets in this phase of the eCommerce inflection.
The image below shows the eCommerce penetration curves for countries; we offer the overall penetration per country in LatAm.
We understand that countries like Mexico, Peru, and Chile offer a massive logistic headwind, lagging any substantial penetration gain.
We forecast a +7% CAGR for Mexico, with 12% penetration (10% today). Nevertheless, Mercadolibre (“Meli”) achieved +70% fulfillment penetration in the country as of 4Q21, and Walmex can reach ~90% of the population in ~10 minutes from its stores.
We highlight that Brazil and Argentina lead among LatAm countries for eCommerce penetration, even though the logistics headwinds were tremendous.
Also, we see a replicable path for increases across the region, primarily driven by logistics improvements; Therefore, we believe that the market is overly conservative in its growth assumptions on LatAm.
In Brazil, logistics improvements have unlocked new categories, with companies including Magazine Luiza (“Magalu,” “MGLU”), Americanas (“AMER”), and Via (“VIIA”) investing in omnichannel logistics. At the same time, Meli continues its marketplace fulfillment center roll-out.
For the other countries in the region, both omnichannel operators (such as Falabella) and marketplace operators (led by Meli) are increasing their focus on eCommerce.
For instance, Meli opened its first fulfillment centers in Chile and Colombia in 2021, supporting our view that company-driven service improvements can drive eCommerce growth above the conservative consensus expectation.
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Superior Economies of Scale
Our industry model illustrates Meli's leading share across LatAm eCommerce; the backdrop in Brazil is competitive, while other countries are more fragmented. As a result, we see Meli leading with ~30% eCommerce market share in Brazil.
Local operators Americanas, Magalu, and Via command a combined ~49%, and Shopee (owned by Sea Ltd) has been gaining ground (~6% 2021 share).
We see Meli and Shopee as best positioned to gain share in Brazil, supported by favorable category mixes, including fewer electronics exposure, as will show soon.
Brazil-based peers lead on first-party goods and omnichannel logistics, but Americanas/Magalu/Via marketplace build-outs remain relatively earlier.
Panning out to the broader region, our LatAm market share analysis illustrates a favorable position for Meli. For instance, we estimate that only by 2026 Meli’s top competitors will reach its market share.
Meli is the only major LatAm operator with a presence across all top markets, and the competitive backdrop ex-Brazil is more fragmented.
While individual countries remain competitive, we see scope for top platforms (led by Meli) to continue concentrating share from the long tail, as we’ll discuss in a few minutes.
Operations for eCommerce are primarily conducted on a country-level basis. Still, gains from platform scale, product development, and data analysis can be spread across the region, taking Meli to an entirely new level compared to its peers.
Economic Headwind Is Not a Concern
We see a mixed top-down backdrop for LatAm Retail into 2022, balancing physical store normalization with pressure from high inflation; on eCommerce, we remain bullish and forecast +21.5% USD growth.
Retail traffic in Brazil and Mexico recently returned to above pre-pandemic levels; however, inflation is eroding purchasing power, pressuring high-ticket goods sales (particularly in Brazil).
The local evidence we take is that Brazilian 10YR rates have rallied by 200bp since their local highs of October 2020.
This is a dynamic found in a few countries in Latin America, such as Chile and Argentina, which are going through a period of higher populist measures that affect bond prices.
Looking out into 2023, inflationary pressures should ease, and central banks begin cutting rates, suggesting that fixed income markets may discount these outcomes in the coming months.
However, the market started lifting expectations for 2023 and 2024 inflation, which could generate additional pressure on BCB policy on rates. So, there is a huge question mark com local rates.
Even though commodities enjoy good fundamentals to outperform markets in the following months, restrictive interest rate levels and supply chain disruption lead to downwards growth estimates, destroying demand.
The data calculated over market expectations collected by the BCB still don’t indicate a contagious for 2023 growth, although they usually happen in the subsequent months.
Despite this muted top-down backdrop, we remain bullish on eCommerce growth in the year ahead — low penetration is critical, ending 2021 at just 13.1% of retail sales across the region.
For 2022E, we forecast +19% LatAm eCommerce growth, including forecast Brazil growth of +17.3% YoY. We are bullish on LatAm eCommerce secular growth, despite potential cyclical headwinds.
To illustrate the overall contribution of penetration growth to the overall eCommerce sales growth in LatAm. Probably, this is one of the most important charts in the post.
The chart above is why we snore when someone is bearish on eCommerce companies in LatAm because of “economic headwinds.”
Unfortunately, macroeconomics never (ever) helped companies to thrive in LatAm. Actually, they destroyed economic value over the years, as the chart below illustrates.
Why will Meli outperform its peers?
To deeply understand why we believe it will outperform its peers, we must assess the breakdown of electronics versus other (long-tail) categories to understand the implication for company-level in the eCommerce landscape.
Our channel checking process involves interviewing and talking to different market participants, asking for a mutual collaboration process, sharing resources, and building knowledge as a team.
While the companies themselves do not report category mixes for gross merchandise value (GMV), our forecasts leverage our industry views.
We cross-check the consensus bottom-up estimates versus our top-down category economic expectations, with a bias toward the macro approach, extrapolating the penetration curve-based digital tools adoption.
From a top-down perspective, we see headwinds for electronics eCommerce in 2022, while a broadening category base supports our +17% growth forecast for overall Brazil eCommerce.
From 2017 to 2020, Brazil went through an easing cycle and low inflation, boosting household indebtedness and durable consumption.
Amidst the Covid-19 outbreak, the government released an enormous fiscal stimulus through wealth distribution called Emergency Aid, boosting the growth in categories such as electronics, appliances, etc.
As a consequence of such a fiscal stimulus package, we now see a combination of high inflation and difficult comparisons (lapping stimulus payments) contributing to the pressure.
From an eCommerce perspective, electronics/appliances/video games/media products account for ~15% of the Brazilian retail market but for ~50% of eCommerce GMV (versus 17%-25% in countries like the UK, China, and the US).
We see long-tail / other categories (including apparel, beauty care, and food) as the critical eCommerce drivers for the following years. Accordingly, we forecast a modest CAGR growth for these categories and an acceleration for long-tail categories.
Our model points to a competitive market for electronics, with Magalu at ~25% 2021E share and each of Meli / Americanas / Via in the high-teens range.
In 2021, according to our estimates, the low recurrency GMV mix (including appliances and accessories) at 84% for Via, 71% for Magalu, 49% for Americanas, and 29% for Meli.
While Meli has been diversifying away from the category — a company fact sheet shows 33% electronics mix in 2021, down from 65% in 2009 – the broadening initiatives for other platforms are earlier-stage in comparison.
Disclosure in Magalu's earnings illustrates ~57% purchases in long-tail categories for the 2021 cohort versus 14% for the 2017 cohort. On the overall GMV, the long tail categories accounted for 45% of Magalu’s GMV in 2021.
While Magalu's marketplace has quickly ramped from a base of zero in 2016, first-party merchandise still represents 63% of MGLU 2021 online GMV; the 1P business over-indexes for electronics.
We see similar trends holding for Via, with 73% 1P penetration and an earlier-stage marketplace roll-out. Americanas, with 42% 1P penetration, have the lowest estimated electronics exposure of Brazil-based peers.
While the category screens are competitive, we believe rationality is a bright spot. However, all players suggest more focus on margin for 1P operations, which will lead to lower growth, considering the incremental headwind from inflationary pressure.
On the other hand, our model shows Meli's wide-scale advantage and Shopee's recent gains for longer-tail categories.
Looking at the Brazil eCommerce high recurrence categories, we see Meli as the scale leader with a 45% share; MELI's presence in long-tail categories over-indexes versus the company's ~30% total Brazil eCommerce share for 2021.
Shopee Threat
A lot is being said about Shopee in Brazil, especially how Sea will capture a lot of market share throughout the following years.
We see Meli and Shopee as top Brazil eCommerce share gainers on our side. For Shopee Brazil, from a base of zero as of early-2019, we estimate a 5% Brazil market share in 2021 and 14% in 2026E.
Our base case forecasts imply Shopee gains continued traction within the lower-ticket categories and younger / lower-income demographics where the company currently over-indexes, while logistics and fintech development remain barriers to a pivot to higher-ticket categories.
For Brazil platforms Magalu, Americanas, and Via, we forecast aggregate share essentially flat at ~47% between 2021 and 2026.
While we believe current merchandise overlap with Shopee remains low, these platforms are, on average, more exposed to the electronics category, where we see a more mature vertical and, therefore, lower eCommerce growth potential.
We see five keys to Shopee's ASEAN success:
Aggressive marketing strategy;
Mobile-first strategy;
Hyper-localization;
Favorable timing;
Network effects.
For Brazil, Shopee has employed the first three keys, while we see barriers to network effects and less-favorable timing due to entrenched local competition.
Since Shopee entered Brazil, the company has seen an upward trajectory in app downloads, website views, and market share, which we view collectively as evidence that the strategy has gained traction.
Shopee's offer of low-ticket merchandise, initially via cross-border sellers and increasingly via local merchants, was largely complementary to what Brazil platforms have focused on historically.
Meanwhile, see logistics remain a crucial competitive advantage for LatAm platforms. Magalu, Americanas, and Via have store and distribution center networks across Brazil, with an embedded omnichannel logistics presence.
Nevertheless, the Asian shipping company J&T Express (privately owned) recently entered Brazil. J&T Express has worked with Shopee for more than five years in Southeast Asia.
Data from the company's 200+ current job openings in the country, many of which are in regional locations, indicate that J&T Express could eventually build out a full-service model across all regions of Brazil.
In fact, in February 2022, J&T Express officially announced its expansion into the Mexican market, where its 12 sorting and 26 distribution centers cover all 32 Mexican states.
Also, more recently, our checks show Shopee increasingly working with Brazil third-party logistics operators such as Sequoia, Loggi, Rede Sul, and Total Express (Portuguese-only).
We believe this can further shorten Shopee's delivery times and help narrow the gap with Brazil platforms, and improve its unit economics.
However, Meli has been building out its fulfillment center network over the past several years; managed network penetration for Brazil reached 89.5% in 4Q21, up from ~30% three years prior.
Meli now cites a 1.5-day average delivery time across its marketplace, while Brazil's peers are increasingly focused on 24-hour delivery for first-party merchandise.
We see logistics as a critical area of the service offering for MELI and Brazil peers, particularly for higher-ticket categories (i.e., electronics, appliances) and higher-frequency goods (i.e., food, personal care).
For Shopee Brazil, we have seen steps to improve delivery speeds, going from ~35-40 day delivery with cross-border to ~6-10 day delivery for local merchants when using Brazil postal agency Correios.
While the hike in Brazil’s take rates back in June 2021 from ~5% to ~12% (18% with shipping included) can help stabilize Shopee Brazil Ebit losses, we currently Ebit per order remains negative in the country.
We are using a similar approach to shipping cost dilution that Sea had in different locations operating in partnership with J&T Express.
Under our assumptions, Shopee should only reach the profitability for new cohorts in 2024, considering the shipping subsidies and the period for achieving enough to dilute its costs.
From a broader LatAm perspective, our view is that the move to a 12% take rate is a rational decision due to competition in a region with high logistics and payment processing costs.
We believe that if Shopee incrementally invests behind free shipping, cashback, or customer acquisition, this could further raise growth costs for LatAm platforms.
We believe Meli is more shielded with region-wide scale, fintech operations, and progress monetizing value-added services, such as ads. At the same time, smaller platforms and category-specific operators face greater potential margin risk.
Meli’s Unit Economics
Most analysts use GMV and Gross Profit multiples to value marketplaces. We respectfully decline to use it.
There has been a widening charm between financial information and stock prices. Until the 70s, there was a strong correlation between earnings and stock return.
The 1980s saw the beginning of the growth and importance of intangible assets. However, even if extraordinary, revolutionary changes did not cause any change in accounting standards.
Entire industries, which are immensely dependent on intangibles (central industries, as Alan Greenspan called them), including software, biotech, and internet services, began to emerge between the 1980s and 1990s.
And for all other businesses, the main drivers of value have moved from property, land, machinery, and inventory to patents, brands, information technology, and people.
This group, which is not present in any balance sheet, is treated in accounting as an expense, generating distortion in both the balance sheet and financial statements.
These three factors — intangibles, the proliferation of managerial guidance, and delays in recognizing important corporate events — explain the distortion.
For its business nature, Meli acquires its customer through its marketing expense and, therefore, doesn’t capitalize it on its balance sheet.
Although we’ll not present our Earnings Power Value for Meli, capitalizing back its intangible, in this post, we believe it’s essential to understand the simple unit economics, as we did for Shopee previously.
In that case, the image below illustrates the first evidence that Meli enjoys a superior competitive advantage versus its peers, generating a lot of cash for its marketplace business.
Second, after almost a dozen industry channel checks, we have enough confidence to estimate the marginal capital invested and, therefore, the ROIC for mature cohorts, as the image below shows.
However, as we didn’t capitalize back the marketing expense, this figure is overestimated, taking us to the third metric, the return on incremental invested capital (ROIIC).
The ROIIC is a much better indicator of profitability since it considers the immediate return from new cohorts. Even though 2020 was an outlier due to mobility restrictions, the 2021 profitability for the new cohorts is outstanding.
Yet, it’s worth mentioning that Meli historically invested all its cash generated in the marketplace business to acquire customers and new ventures, leading unaware investors to believe that Meli operates an inferior business.
For curiosity, another setback we have with multiple valuations (especially EV/Sales and EV/GP) is that management could easily misguide investors by paying too much for a cohort.
For instance, companies offering cashback prizes to acquire customers might generate huge incremental sales in the first moment.
However, poorly designed cashback programs usually might lead to an unbalance in the sales mix — people buying more electronics, appliances, etc. This is what Brazil partially witnesses from 2017 to 2020.
Then, after a couple of years, growth eventually decelerates, and portability vanishes, even though the EV to Sales multiple for those businesses was giving the wrong impression about its valuation.
In the past four years, we could easily mention three or four companies that issued capital, and boosted growth with cashback and screwed their unit economics in the following two years.
Finally, we expected you enjoyed this overview of the marketplace outlook and how we see Meli positioned for the subsequent years.
We presented material evidence supporting our thesis that Meli will keep delivering superior returns through the following years since it enjoys a better sales mix and economies of scale.
In the next post, we expect to explain another pillar that sustains Meli’s growth: logistics. We hope to see you there.