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Searching for the next Amazon in Latin America

SINGAPORE (Mar 25): Can you name a large-cap, Amazon-lookalike e-commerce stock that has risen more than 3,700% since its IPO in 2007, or 400% since late 2015, and is still up 66% this year? I’ll make it a little easier. No point searching for it in China because it is neither a competitor to Alibaba Group Holding nor an affiliate of Tencent Holdings. With a market capitalisation of US$22 billion ($29.7 billion), that company is MercadoLibre, the largest listed e-commerce player in Latin America.

Mercado is Spanish for “marketplace” and Libre means “free”. Founded in 1999 by Marcos Galperin, an Argentinian student at Stanford University at the time, Mercado­Libre is based in Buenos Aires, incorporated in Delaware and listed on the tech-heavy Nasdaq. It is essentially an online marketplace where you are at liberty to buy or sell whatever and whenever you want. Originally modelled after eBay, which once had a 20% stake in it, its portal is the main online auction site for the Spanish- and Portuguese-speaking communities in Latin America, and operates in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Uruguay and other countries in the region, including troubled Venezuela.

Although it is based in Argentina, more than half of the company’s revenues are derived from Brazil, Latin America’s largest economy. Over the years, it has morphed into something akin to Alibaba’s T-Mall and Taobao marketplaces, with a PayPal-like payment system to facilitate and grow e-commerce in a continent in which financial inclusion is still a big issue.

In late February, MercadoLibre reported revenues and earnings for the previous quarter, handily beating analyst expectations, and its stock soared 21%. More recently, the stock has corrected from its record highs after it used the big run in its stock price to raise a lot of cash. That is making investors wonder whether Latin America’s best-known internet stock’s bubble may have finally popped.

Beefing up the coffers

On March 11, global payment giant PayPal Holdings bought a U$750 million stake in MercadoLibre through a share placement. That was part of a total US$2 billion in capital-raising for the Latin American e-commerce giant to beef up its dwindling coffers, including US$1 billion in new equity aside from shares that PayPal is subscribing to. San Francisco-based Dragoneer Investment Group — which owns stakes in Airbnb and Spotify, and which counts David Bonderman, founder of private-equity giant TPG, as a key investor — will buy US$100 million in a special series of perpetual preferred shares convertible into ordinary voting shares.

The investment in MercadoLibre, which accounts for a stake of just under 3%, gives Paypal a “seat at the table” in Latin America, one of the final frontiers of e-commerce growth, alongside India and Southeast Asia, says Lisa Ellis, an analyst for Moffett­Nathanson in New York. And, like India, the battle in Latin America is between Walmart, and a bunch of large local and regional players such as Brazilian e-commerce giant B2W Companhia Digital and Amsterdam-based and Nasdaq listed e-commerce player cnova, part of French retailer Groupe Casino.

The steep rise in MercadoLibre’s stock came in the wake of renewed interest in payment stocks. Shares of incumbent credit card giants such as Visa International and Mastercard touched their all-time highs recently. Both are up 27% over the past year. Of the two big disrupters in the space, PayPal shares are up 25% and Square is up 39% over the past 12 months. PayPal now has a market cap of US$120 billion compared with US$74 billion for Goldman Sachs and US$75 billion for Morgan Stanley. On March 17, Fidelity National Information, a tech solutions and payment processing firm, announced that it was buying WorldPay, a payment processor, in a US$35 billion cash-and-shares deal. A key market for the merged firm is e-commerce payments in Latin America.

Over the next couple of weeks, Italian payments firm Nexi is set to raise €2.7 billion ($4.1 billion) in an IPO, making it the biggest European fintech listing. Deal-making in the global payments industry is touching new heights, with 2018 the biggest year ever in terms of M&A activity in the sector, according to research consultancy Dealogic. Just in the first six months of last year, there were 102 transactions worth a total of US$45 billion, surpassing 2017’s full-year figure of US$32.9 billion.

Clearly, few sectors are undergoing such a tectonic shift as payments, which is moving from cash transactions to almost completely digital. In China, digital payment players such as Alibaba’s AliPay and Tencent’s WeChatPay are the dominant players. In Southeast Asia, ride-hailing companies such as GoJek and Grab are trying to muscle into the payments business. “We are seeing a huge acceleration in cash displacement trends in emerging markets, not just China and India but also Latin America,” says MoffettNathanson analyst Lisa Ellis.

Cash still accounts for 70% to 80% of consumer transactions in most Latin American markets. The other big driver of the boom in digital payments is e-commerce. “All payments online are done through a code. So, that also helps drive out cash,” she notes.

Growing market

Why Latin America? And why now? For one thing, Latin America and the Carribbean form a market almost the size of Southeast Asia or Asean. For another, its demographics are almost as good. Moreover, over the past 15 years, the expansion of Latin America’s middle class has lagged only one other market: China. Although ave­rage GDP growth in the region of under 3% is half the comparable growth in Southeast Asia, it has been re-accelerating after a few years of stagnation. There are currently about 450 million internet users in Latin America, up from just over 300 million in 2013. Two-thirds of the region’s population now regularly access the internet.

Outside of India, Latin America is the biggest market for both Facebook as well is its stablemates Instagram and WhatsApp. China’s Alibaba, Baidu, Tencent, Meituan Dianping and ride-hailing firm Didi Chuxing have invested in Latin America in recent years. Chinese smartphone makers such as Xiaomi and Huawei have made huge inroads into Latin America with their low-priced handsets. The region was seen as a beachhead before the Chinese tech firms expand in the US. But even as Chinese internet firms feel less welcome in North America now, they have stayed put down south as that market develops.

“There’s a sense that Latin America is at a tipping point in terms of e-commerce growth,” Sean Summers, MercadoLibre chief marketing officer, told journalists recently.

Earlier this month, Japan’s tech-focused conglomerate SoftBank Group, which has raised US$96 billion for its Vision Fund, announced that it had set aside US$5 billion for a Latin American tech fund. “There is so much innovation and disruption taking place in the region, and I believe the business opportunities have never been stronger,” Marcelo Claure, Bolivian-born chief operating officer of Softbank, said in TV interview last week.

So, what will MercadoLibre do with the US$2 billion cash injection that it is getting? Some analysts believe it may be building a war chest to become more aggressive, particularly to accelerate investments in its key businesses, as well as boosting free shipping the way Alibaba and Amazon did in their home markets to grab a larger market share and drive out competition.

While the firm has not specified what the funds would be used for, analysts expect that it will plough up to US$1.8 billion into its business — including US$606 million in shipping subsidies, US$206 million in R&D, US$819 million in sales and marketing, and $148 million in capital expenditure. “MercadoLibre could accelerate fulfilment investments in Brazil and Mexico and accelerate the rollout of existing and new fintech services,” says UBS analyst Gustavo Piras Oliveira. Indeed, he notes PayPal’s involvement in the company could add new capabilities in payment services.

Set to grow

MercadoLibre is forecast to grow net revenues to US$2.03 billion this year and earnings before interest, taxes, depreciation and amortisation of US$77 million. By next year, it could break even or, indeed, even make a bit of money. Forecasting MercadoLibre’s financials needs one to be a foreign-exchange expert. Almost all of its revenues are in local currencies whereas it reports earnings in US dollars. The big growth is coming from Brazil and Mexico, the region’s two big economies where Mercado­Libre is growing faster than the overall e-commerce market, even against Amazon and Walmex, Walmart’s Mexican unit.

The Latin American e-commerce giant is no different from peers that have required huge investments on their platform for years before they acquire scale and start making money. Amazon famously lost money for two decades before it turned a corner by making the right call on its cloud infrastructure Amazon Web Service, which now helps subsidise its still-loss-making online retailing operations.

While investors were unusually patient with Amazon during its loss-making years, they have been less reluctant to keep ploughing money into other similar e-commerce players. Whether investors will remain calm and shrug off red ink for a few more years or demand a quicker path to profitability is still unclear. Investors do not doubt that MercadoLibre has built a great franchise and will eventually make money. What they worry about is whether its high-flying stock deserves the huge premium that it currently commands.

Assif Shameen is a technology writer based in North America

This story appears in The Edge Singapore (Issue 874, week of Mar 25) which is on sale now. Subscribe here

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