Mercado is the largest e-commerce platform in Latin America with over 400 million active users. Its business is divided into two main segments: Commerce and Fintech.

Mercado's Commerce business covers 18 countries, including Argentina, Brazil, and Mexico, and encompasses Mercado Libre Marketplace (core e-commerce platform), Mercado Envios (platform logistics services), Mercado Ads (platform advertising business), and Mercado Shops (digital stores). services).

The Fintech business, on the other hand, covers eight countries, including Argentina, Brazil and Mexico, and involves Mercado Pago (platform and offline payment services) and Mercado Crédito (platform credit services).

In addition, the Company launched Mercado Play, an advertising-based video-on-demand streaming service, in 2023, covering seven countries, and an upgraded "Meli+ Loyalty Program" membership subscription in 2024.

Commerce Business

Competitive Landscape and Competitive Advantage

According to Euromonitor.In the Latin American e-commerce market, Mercado is firmly established as the regional leader.With a market share of 261 TP3T in 2024, it is well ahead of second-place Amazon (with a market share of only 7.91 TP3T). Other contenders after number two, such as Chinese cross-border e-commerce companies Shein and Shopee, as well as local Latin American platforms Coppel and Magazine Luiza, do not have a market share of more than 2.51 TP3T.

We believe that Mercado's core competency lies in the abundance of its merchandise and superior delivery timeliness.

Product richness: "full category coverage" to crush rivals

As of 2023, Mektor's SKUs have exceeded 350 million, covering a wide range of categories such as 3C, household, FMCG, and auto parts, and introducing sellers' goods from China and the U.S. through cross-border trade (CBT).

In comparison, Amazon Brazil has about 150 million SKUs, mainly focusing on high unit price categories such as 3C, with low penetration of local small and medium-sized sellers; Chinese cross-border e-commerce companies Shein and Shopee: Shein focuses on fast-fashion (about 20 million SKUs), and Shopee focuses on low-priced markdowns (about 180 million SKUs) but lacks high-unit-price items; and local Latin American platforms Coppel and Magazine Luiza: less than 100 million SKUs, focus on limited categories such as home appliances and furniture, and rely on local brands.

It follows thatCompared with its competitors, Mektor has achieved "full category coverage" of cross-border and local products, successfully realizing the full reach of users' needs, thus forming a differentiated competitive barrier.

Distribution timeliness: rewriting regional fulfillment standards with self-built logistics network

Compared to Amazon, when users in São Paulo, Base Brazil purchase a smartphone, Mercado can ship it directly from a local warehouse and deliver it within 8 hours, while Amazon has to transfer it from the Curitiba fulfillment center, which takes more than 24 hours. Compared to Chinese cross-border e-commerce companies Shein and Shopee, Shopee's delivery timeframe is 2-22 days, while Mercado's is only 1-6 days, according to JPM's January 2024 measurement of delivery timeframes for Shopee and Mercado (based on shipping to São Paulo, Brazil). In contrast to local Latin American platforms Coppel and Magazine Luiza, which rely heavily on offline store pickup, online delivery is only supported for delivery within 48 hours.

It can be seen that compared to its competitors, Mektor is clearly ahead in terms of delivery time, creating a significant competitive advantage.

This advantage stems from Mercado's own logistics network, Mercado Envios.Covering a variety of innovative delivery models, including FBM ('Fulfillment by MELI', similar to Amazon's FBA), Cross Depot Delivery, MELI Air (air delivery covering Brazil and Mexico from 2020 onwards), MELI Places (self-pick-up points, similar to a Caijiao post station) and Flex (in-city home delivery). Together, these models support logistics services for the platform's 94% of sold goods, of which 76% can be delivered within 48 hours and 52% can be delivered the same or next day (FY2023 data).

KPI analysis

With these two competitive advantages, Mercado has consolidated its absolute leadership position in the Latin American market, which has been successfully transformed into aThree core operating results: GMV growth, user value enhancement, and a jump in realizability.

GMV growth

Latin America's e-commerce market is undergoing a qualitative change from a "fringe channel" to a "core infrastructure" - the industry's penetration rate jumped from 4% in 2017 to 14% in 2024 (Morgan Stanley), meaning that one out of every seven dollars of retail spending will be done online, especially in 2020, when the epidemic is causing serious challenges to offline retail. 14% (Morgan Stanley), which means that one out of every seven dollars of retail spending is done online, especially in 2020, the epidemic caused by offline retail encountered serious challenges, further accelerating the substitution effect of e-commerce on offline channels.

As a regional leader, Mercado is bound to benefit from the industry's beta dividend. The company's GMV has grown from $11.75 billion in 2017 to $51.47 billion by 2024, with a CAGR of 23.51 TP3T. with a particularly impressive year-over-year surge of 49.51 TP3T in 2020.

In terms of the composition of GMV, it is broken down into the dimensions of ASP and number of items sold.

For ASP, it decreased from US$43.5 in 2017 to US$28.8 in 2024 (cumulative decrease of 33.81 TP3T). This change reflects the company's strategic reorganization of its merchandise mix to increase the supply of low-priced categories such as FMCG and household and daily necessities, and to accurately target the low- and middle-income groups in Latin America (according to the WB's Regional Poverty and Inequality Update released in October 2024, the share of groups with daily incomes of less than $6.85 is 251 TP3T.) In 2020, the ASP plummeted by 20.91 TP3T, which is highly consistent with the trend of increased consumer price sensitivity during the epidemic.

The number of items sold will grow from 270 million in 2017 to 1.79 billion in 2024, with a CAGR of 31%, of which the year-on-year growth rate in 2020 will be 89.1%, a record high. The exponential growth in the number of goods sold validates the effectiveness of the company's low price strategy, while the outstanding performance in 2020 fully reflects the company's success in seizing the key window of "online shopping rigid demand" during the epidemic.

To summarize, Mercado not only rides on the momentum and enjoys the industry's beta dividend, but also builds a growth alpha through its precise low-pricing strategy, ensuring a solid GMV expansion.

User Value Enhancement

The number of active buyers in Mektor grows from 74 million in 2022 to 100 million in 2024, with a CAGR of 16.31 TP3T, demonstrating strong user acquisition.

During the same period, theARPU increased from $78.5 to $121.6, with a CAGR of 24.7%, a growth rate that significantly outpaced the growth in subscribers, confirming that the company is shifting from "pulling in the new" to competing for a share of the user's wallet.

We believe that the key to the company's ability to stand out in the race for wallet share is its superior ecological synergy.

Mercado is not only an e-commerce platform, but also builds and operates its own fintech platform (Mercado Pago), advertising platform (Mercado Ads), logistics network (Mercado Envios), and streaming media service (Mercado Play). These businesses channel and synergize with each other to enhance user stickiness and platform ARPU. for example:

• Payment (Mercado Pago) → E-commerce (Mercado Marketplace) synergy: In order to enjoy payment benefits (e.g. points rebate, interest-free installment), users are more inclined to shop in the Marketplace, thus enhancing user stickiness. At the same time, payment records help the platform recommend products accurately (e.g., frequent milk powder buyers will see baby stroller ads), realizing data integration and precision marketing.
• Streaming (Mercado Play) → Advertising (Mercado Ads) → E-commerce (Mercado Marketplace) synergy: through free content and localized operations (e.g., exclusive licensing of Latin American episodes), Mercado Play effectively entices users to stay and watch episodes, during which they may be attracted to ads and return to the Marketplace to make purchases. Mercado can also deliver ads based on the user's viewing preferences, for example, a user who likes action movies will see ads for sneakers.
• Mercado Crédito → Mercado Marketplace synergies: for example, users who would otherwise only be able to buy a $200 cell phone can choose to buy $400 worth of cell phones through Mercado Crédito's "Zero Down Payment Installment" option, which effectively stimulates spending. The option of "zero down payment installment" offered by Mercado Crédito gives them the option to buy a cell phone worth $400, effectively stimulating spending.

Taken together.A user may stay because he watches a movie (Play), buy more goods because of installment payments (Crédito), and become a loyal customer because of payment offers (Pago).Ultimately, we see Mercado's ARPU increase from $78.5 in 2022 to $121.6 in 2024, successfully transforming from an e-commerce platform to a super ecosystem that users can't live without.

Leap in liquidity

Mektor's Take rate jumped from 9.6% in 2019 to 23.6% in 2024, a cumulative increase of 1,400 basis points and a qualitative leap in liquidity.In our view, there are two main structural drivers behind this:

• First, the commission model has been upgraded from "collecting tolls" to "selling value-added services".Specifically, the upgrade of the commission model is reflected in two major aspects: logistics and advertising. In terms of logistics, the early logistics services only covered basic services, and the revenue mainly came from charging sellers fixed shipping fees; under the new model, Mercado relies on its own logistics network (Mercado Envios) and automated warehouses, and introduces dynamic pricing strategies (e.g., tiered fees based on the timeframe of delivery: next day delivery, next day delivery, etc.), and provides value-added services (e.g., warehouse management, return and exchange processing and other surcharges). This transformation has not only enriched revenue streams, but also significantly improved the flexibility and competitiveness of the platform. In terms of advertising, the early forms of advertising were mainly fixed banner ads, and the revenue depended on the scale of traffic; whereas under the new model, sellers can pay a premium for keyword rankings or choose higher-priced video ads (such as Mercado Play's patch ads). This upgrade makes ad revenue no longer dependent on traffic alone, but closely tied to sellers' specific marketing needs, further enhancing the platform's ability to realize cash.
• Second, provide high-margin services.For buyers, on the one hand, in terms of member services, under the old model, buyers can enjoy basic services for free, and the platform is mainly profitable through transaction commission; while under the new model, Mektor has introduced a tiered subscription system ('Essencial'/'Total '), users can enjoy lower free shipping threshold, exclusive discounts and streaming services and other privileges after payment. On the other hand, in terms of commodity services, value-added services such as extended warranty and priority customer service were only applicable to a small number of high-unit-price commodities under the old model; under the new model, these services have been transformed into standardized service packages that widely cover all categories of commodities. For sellers, Meiktor also provides data analysis tools, such as user profiling tools (e.g., repurchase rate prediction), to help sellers accurately understand and meet buyers' needs. Through these initiatives, Meiktor not only enhances the shopping experience of buyers, but also strengthens sellers' reliance on the platform, thus significantly increasing the willingness to pay and long-term stickiness of both buyers and sellers.

Fintech Business

competitive landscape

According to UBS Research, in terms of the number of monthly active users, theNubank (Brazil) is the largest fintech bank in Latin America with a market share of 37% in March 2024, while Mercado is third with a market share of 11%.

The core differences between Mercado and Nubank are as follows:

• User Size:Nubank has a large user base. As of the third quarter of 2024, Nubank had 91.7 million subscribers, which is 1.6 times the 56.2 million subscribers of Mercado.
• Asset side:Nubank's business relies heavily on credit cards (73% of the loan portfolio) and its model is similar to that of a traditional bank, while Mercado has a diversified strategy, with credit cards accounting for 39%, consumer lending (42%) and merchant lending (19%) synergistically driven by a business structure that better matches e-commerce ecosystem needs (e.g., consumer installment, merchant business lending).
• Liability side:Nubank relies on high-interest time deposits, while Mercado is financed primarily through low-interest prepaid deposits.

Competitive advantages

Based on an analysis of key fintech metrics, Mercado demonstrates significant competitive advantages over Nubank in the following four areas:

First, the growth momentum is stronger.

Since Q3 2023, Mercado has outpaced Nubank in terms of user growth (in Q3 2024, for example, Mercado grew by 8.1% year-on-year, compared to Nubank's 5.2%.) Mercado's credit card business has also achieved a reversal of Nubank's growth since 2024, demonstrating even stronger expansion momentum.

Second, risk adjustment is more agile.

Mercado is more responsive to changes in risk. When asset quality declines, Mercado is able to adjust its risk appetite quickly, which may reflect the shorter duration of its loan portfolio or the greater flexibility of its risk model. With this advantage, Mercado is able to respond more effectively to the highly volatile emerging market environment.

Third, the cost of capital is more advantageous.

Mercado uses user advances and merchant deposits deposited through its own e-commerce platform ecosystem as a low-cost source of funding, while Nubank relies on high-interest time deposits for funds solicitation, resulting in higher funding costs.In Q3 2024, the deposit-to-loan ratio for Mercado's Brazilian operations was 241 TP3T, much lower than Nubank's 451 TP3T.

Fourth, TPV is growing at a faster rate and has a better ability to realize.

In recent quarters, Nubank's TPV growth rate has slowed down, while Mektor continues to grow strongly. in Q3 2024, Mektor's Take rate was about 4%, which is 4 times higher than Nubank's (about 1%). This means that Mercado earns $4 per $100 of transactions processed, while Nubank earns only $1.

Areas to be optimized

Also based on the analysis of key fintech metrics, there is still room for optimization in the following two areas for Mercado compared to Nubank:

First, asset quality is under pressure.

Although Mercado's risk-adjusted net interest margin is higher than Nubank's (24.21 TP3T vs. 18.91 TP3T for Nubank in Q3 2024), its non-performing loan generation rate (NPL) and 90+ day delinquency rate in the Brazilian market (E-H metrics) are higher than Nubank's, and asset quality is under greater pressure.

Second, profitability efficiency needs to be improved.

Mercado leads in TPV growth and realizations, but its pre-tax margin was only 101 TP3T in Q3 2024, well below Nubank's 281 TP3T, with limited earnings visibility.

financial analysis

revenues

In fiscal year 2024, Mercado achieved revenue of $20,777 million, up 37.51 TP3 T. This significant growth was driven by the following four core drivers:

• Upgraded logistics service model, by expanding the proportion of autonomous logistics services (Principal model), net logistics costs decreased by US$1,441 million year-on-year (down 58.51 TP3T), directly augmenting revenues.
• Commerce's GMV grew 15% year-on-year, continuing to expand through the "price for volume" strategy.
• The credit business saw high volume (consumer lending portfolio up $43.31 TP3T, merchant lending portfolio up $76.51 TP3T, credit card portfolio up $118.31 TP3T), which added $1.054 billion to revenue, up $41.41 TP3T year-over-year.
• Fintech business TPV grew by 34% YoY; Fintech business TPV has continued to grow at a high rate since FY2019 (CAGR of 47.3% from 2019-2024), proving the key role of the e-commerce scenario in driving the online payments business.

gross margin

Gross margin declined by 4.1 percentage points year-over-year to 46.21 TP3T. this change mainly resulted from the upgrade of the logistics service model. in 2024, net logistics costs decreased by $1,441 million year-over-year, however, due to the fact that as the primary party (Principal) for logistics services, the related fulfillment costs, such as warehousing and transportations, are included in COGS rather than being deducted from revenues.

Despite the increase in logistics revenues in absolute terms, the rise in associated costs put pressure on gross margins. This decline in gross margins reflects the company's phase-in period of strategic investment.

operating profit margin

The EBIT margin declined by 1.9 percentage points year-on-year to 12.71 TP3 T. This change was mainly driven by the high volume of the credit business (especially credit cards), which led to an increase in the average balance of the loan receivable portfolio by 62.81 TP3 T, which in turn triggered an increase in the provision for bad debts of $808 million.

net profit

For FY2024, Mercado realized net income of $1.911 billion, up 93.61 TP3T. there are two main drivers:

• First, EBIT growth. Thanks to strong revenue growth, effectively offsetting the rise in COGS and OpEx.
• Second, foreign exchange losses narrowed. in fiscal year 2023, Mercado's net foreign exchange losses were $615 million, a significant increase from $182 million in fiscal year 2022. in fiscal year 2024, Mercado managed to control its foreign exchange losses, narrowing them to $198 million.

Valuation analysis

For FY2024 net income of $1.911 billion, the market gives Mercado a P/E of 52.98x, a premium of 187.7% to the peer group's comparable average of 18.42x P/E.

High valuation key factors

We believe that the market's high valuation of Mercado may have reflected several key factors:

• Market share barriers:Mercado's share of the Latin American e-commerce market is a whopping 26% (2024), far exceeding the second-place Amazon's 7.9%, showing its dominance and leadership in the regional market.
• Scarcity premium:Mercado is the only e-commerce and financial eco-platform in Latin America capable of realizing the whole chain of e-commerce → payment → credit, with no direct comparable company and business synergy that is difficult to replicate. This scarcity gives Mercado's business model a significant premium in the market.

valuation risk

We believe that while the above factors support Mercado's high valuation, there are potential valuation risks as described below:

• Risk of increased competition:According to Juliana Sztrajtman, the new General Manager of Amazon Brazil, speaking on February 28, 2024, Amazon sees Brazil as a "strategic marketplace" and plans to invest more and lower the Take rate for sellers.In recent years, Mercado has been benefiting from the reduced competition from local players due to a focus on break-even ("BS/P&L"), but the competitive landscape could be intense in the future. In recent years, Mercado has benefited from local players focusing on break-even ("BS/P&L") to reduce competition, but the competitive landscape is likely to become more intense in the future.
• Policy uncertainty:Brazil's central bank raised its benchmark interest rate to 14.25% (the highest since late 2016) on March 10 this year. Mercado's credit business (e.g. consumer loans, merchant loans) relies on local financing and net interest margins will come under pressure as the cost of funds rises. In addition to pressure on the funding side, the high interest rate environment may also dampen demand, leading to a decline in consumer demand for installment payments (e.g., lower demand for loans for 3C products), and a possible contraction in SME lending expansion plans, which in turn will affect the growth rate of the credit business.

summarize

To summarize, Mercado breaks through the boundaries of traditional e-commerce and builds a complete ecological closed loop covering digital payment (Mercado Pago), precise advertising (Mercado Ads), intelligent logistics (Mercado Envios) and entertainment streaming (Mercado Play).

These business units form a unique synergy through data sharing and scenario nesting, making Mektor an e-commerce + fintech super ecosystem that users can't leave.