MercadoLibre Still Has Growth Ahead

MercadoLibre (NASDAQ:MELI) recently announced their Q2 results, and at a time when other online retailers are providing disappointing numbers, the company continues to outperform the market. Q2 revenues of $40.9 million grew 19% over the year and a whopping 42% in local currency terms. Net income grew 127% over the year to $6.7 million.

Marketplace revenues grew 10% to $31 million and Payments revenue grew 61% to $10 million. Revenue growth was driven by positive demand for MercadoLibre’s services. Items sold on the company’s site grew 35% and represented the fifth consecutive quarter in which growth in this metric has accelerated. Total payments transactions grew 42% over the year.

I continue to believe that MercadoLibre has huge potential. Internet penetration in Latin America currently stands at a mere 30%. Compare that with 74% in the US. Factors such as low PC penetration, insufficient infrastructure, and regulatory hurdles are key contributors to this low rate. But the situation is improving.

A report which published PC penetration statistics for 2008 claims the region had poor 14.7% penetration in the year, with Uruguay leading at 27.2% penetration. In Brazil, the PC penetration is under 25%, but analysts expect it to grow at a CAGR of nearly 11% from 2008-2013 to reach 36% penetration by 2013. Today, Positivo Informatica leads the branded computer market share in Brazil with 25% of the market in Q4 2008. But even they are facing tough times with reduced spending and are focusing on government budgets instead of retail budgets. The likes of Dell and HP are looking at expanding within the retail segment in the region by opening more stores, but the credit crunch and the expensive US dollar have hurt their retail sales.

Broadband penetration in the region was only 4.9% in early 2009, but Latin America was the world’s fastest-growing broadband market in the fourth quarter of 2008. Over the year, Colombia reported growth of 64% in broadband subscriber base with 4.1% penetration, followed by Mexico’s 52% growth at 6.5% penetration. Chile and Argentina boast of better penetration levels of 8.7%.

In Brazil, the broadband market growth remained more than 40% to reach 10 million connections by the end of 2008. However, the penetration rates are still low at 5.3%. While DSL remains the preferred technology for broadband connections, there is interest in cable modem connections with triple-play services helping to drive up subscriptions. The broadband market has also been booming, particularly in Chile, aided by the launch of the WiMAX network in October 2007. Analysts believe that WiMAX will play a big role in improving Internet penetration in the region.

Mobile broadband is also growing. In Brazil, operators are marketing 3G as a substitute for fixed broadband connections. 3G network implementation in Latin America began nearly three years ago, but now most of the region’s markets have adopted 3G networks which are designed primarily for mobile Internet usage. Gartner estimates a modest 4.8 million subscriber base for W-CDMA-based 3G networks, and around 2 million EV/DO users region-wide at the end of 2008. Another report claims that the number of Universal Mobile Telecommunications System/High Speed Packet Access (UMTS/HSPA) subscribers in the region grew 75 times over the year to 4.7 million in 2008.

The greatest barriers to higher 3G penetration in the region are spectrum and pricing. With spectrum almost rationed out to operators, operators are following the path of further rationing mobile Internet use through monthly download caps and tiered pricing packages.

Even within convergence offerings there are still regulatory issues. For instance, in Argentina, a telecom company must tie up with a cable operator to offer converged services, and in Uruguay, cable companies cannot offer either Internet or voice services.

As the region liberalizes its telecom infrastructure, e-retailers such as MercadoLibre should be able to deliver excellent results. The company’s stock is trading at $30.44 with a market capitalization of $1.34 billion.