Shares of the Latin American e-commerce and payments giant MercadoLibre (MELI 1.14%) rose 5% after it reported strong earnings. Its growth was strong across all parts of its business.
MercadoLibre's earnings were impressive, but if you want to beat the market over the next five years, is this company the right one to add to your portfolio? After all, the company is already worth over $80 billion. The answer lies within consistent dominance that was shown in its third-quarter performance. Despite its size, the company's market and optionality could allow it to continue crushing the market for many years, which is why I still think it's worth buying today.
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Third-quarter highlights
MercadoLibre operates in 16 countries across Latin America, including Mexico, Argentina, and Brazil -- offering solutions to help democratize and popularize digital payments and e-commerce. The company's three main solutions are its e-commerce arm, its fintech arm Mercado Pago, and its logistics service Mercado Envios.
Mercado Envios shipped over 247 million items in Q3, 80% of which were delivered within 48 hours. Over half of Envios' shipments were same-day or next-day as well -- demonstrating that Envios was been able to overcome the challenges of its large geographic footprint. What might be most impressive about Envios is that it controls 37% of fulfillment in its markets, driven ahead by 65% control in Mexico.
Its e-commerce platform -- its most mature segment -- saw astounding growth despite its maturity. The company's gross merchandise volume grew 30% year over year to $7.3 billion, which is especially impressive considering the incredible performance it had during Q3 2020 -- when it had strong tailwinds from the COVID-19 pandemic. Items sold grew 26% to 260 million compared to Q3 2020, and its commerce revenue increased 69% year over year reaching $1.2 billion.
Its Mercado Pago segment also saw rapid adoption. Total payment volume increased 59% to $21 billion with over 865 million transactions, growing 55% year over year. Pago's off-platform payments -- which are payments not on its e-commerce site -- represented 64% of volume, which demonstrates Pago's broad adoption across its geographies. Pago now has over 20 million investment accounts, 31.6 million active users, and 17 million wallet payers -- which are consumers who use Pago to make payments at least 20% of the time.
All of this led to total revenue growing 73% to $1.9 billion, driven by 94% revenue growth in Mexico, 74% growth in Argentina, and total active users reaching 79 million. MercadoLibre's gross margin increased from 43% in Q3 2020 to 43.5% in Q3 2021, and the company grew its net income by more than 500% -- from $15 million in Q3 2020 to $95 million today.
What could slow down this giant?
At 15 times sales, MercadoLibre isn't cheap. While it is cheaper than other international e-commerce players like Sea Limited (SE -0.97%) -- which trades at 26.5 times sales -- the stock is still expensive. The reason for this might be because the company faces extreme competition, namely from Sea Limited.
Sea Limited -- which has a similar business model with e-commerce, fintech, and gaming arms based in Singapore -- announced in late 2019 that the company is attempting to expand its video game service and e-commerce arm into Brazil.
Sea Limited has seen immense success in Brazil with its e-commerce business: In Sea's recent quarter, it announced that Shopee -- its e-commerce arm -- ranked first in the shopping category by downloads and total time spent in-app. Sea also said the company's monthly active users in Brazil are the second-largest in the country, behind only MercadoLibre presumably. Despite operating in Bazil for just two years, Sea Limited has already seen amazing success, which is worrisome for MercadoLibre.
A bright future awaits
While nearly 80 million active users sounds like a lot, it is minimal compared to the population of the geographic regions MercadoLibre covers. Across the 16 countries MercadoLibre operates in, there are 646 million people. Latin America is also one of the fastest-growing e-commerce regions in the world.
MercadoLibre has just 12% of its target population across all platforms, meaning there is tons of room to expand its customer base and to cross-sell to its existing customers. The company is growing fast, and its ability to continue growing is still present. While the company is worth $80 billion, there is potential for the company to grow by multiples from here, and if it can continue modernizing and democratizing Latin American commerce, MercadoLibre could achieve this potential.
