<body><div class=r_txt5><h1><span id=mstarAnalystTake style=font-weight:bold;> COVID-19-Related Demand Increases Unlock Revenue and Margin Opportunities for MercadoLibre </span></h1></div><div class=hspacer1></div><div style="border-top:1px solid #999;"><div class="ar_biowrap text1"><div class=ar_bio><img height=78 onerror=this.src='//analysisreport.morningstar.com/analyst/static/common/img/mstaranalyst.jpg' src=//im.mstar.com/Content/CMSImages/78x78/2243-dswartz-78x78.jpg width=78><h5><a href=//analysisreport.morningstar.com/analyst/stock/authorBio?t=MELI&region=usa&culture=zh-TW&productcode=QS&urlCookie=8997523520&e=eyJhbGciOiJSU0EtT0FFUCIsImVuYyI6IkExMjhHQ00ifQ.eY-s57E4rNn2aO0mdtQy4usd4MgSf5udSvrSfPlx1CR8UvQL-J2fAl-VM8li_sYc2QXO6QycfEv8yVzZ2N7bvNHC1yYrw-7azD4-Pf7enaNTK3hrGGLRpuQvnb2fsYaVrl-rfNY9qF3MT8zv4yY_C5NnYALL7i3LU5WCtOqboUw.iwvYb9QzHz9tiTU6.b1EtzaNCVJLTwN7nrWWU9ZQn7_OGtfjIvpEdxG7NfHa1yz5DACf2DqQpY81QZyqOxd0tKNnorEdis7OdtDYff3cciQOYIv1UMV7KsWI5niMGxHHw1nh4ozFv3nYYdqLDS71TH6mxu-rpQGcH18aD8HBBdTvFussfYiSI7U88YebdZhlGyZVxBAiYvgZteGXZN1xQKJTWc1Z2pQPdzn9-KaIDqVz2XsG87r6LOGk.SkvwYrJFtA4f2pft6D_Jxg> David Swartz </a></h5><div style=font-size:10px;margin-top:10px;display:inline;width:90px;float:left;>Equity Analyst</div><div class=row2><a href="javascript:openDefWin('//analysisreport.morningstar.com/analyst/feedback_edit?&t=XNAS:MELI&region=usa&culture=zh-TW&productcode=QS&cur=&urlCookie=8997523520&e=eyJhbGciOiJSU0EtT0FFUCIsImVuYyI6IkExMjhHQ00ifQ.eY-s57E4rNn2aO0mdtQy4usd4MgSf5udSvrSfPlx1CR8UvQL-J2fAl-VM8li_sYc2QXO6QycfEv8yVzZ2N7bvNHC1yYrw-7azD4-Pf7enaNTK3hrGGLRpuQvnb2fsYaVrl-rfNY9qF3MT8zv4yY_C5NnYALL7i3LU5WCtOqboUw.iwvYb9QzHz9tiTU6.b1EtzaNCVJLTwN7nrWWU9ZQn7_OGtfjIvpEdxG7NfHa1yz5DACf2DqQpY81QZyqOxd0tKNnorEdis7OdtDYff3cciQOYIv1UMV7KsWI5niMGxHHw1nh4ozFv3nYYdqLDS71TH6mxu-rpQGcH18aD8HBBdTvFussfYiSI7U88YebdZhlGyZVxBAiYvgZteGXZN1xQKJTWc1Z2pQPdzn9-KaIDqVz2XsG87r6LOGk.SkvwYrJFtA4f2pft6D_Jxg',490, 510)"> </a><div style=display:none><span id=mstarAnalystEmail> david.swartz@morningstar.com </span></div></div><div class=row2>Take <a href=javascript:openDataDefs('//analysisreport.morningstar.com/analyst/stock/MorningstarAnalysis?&t=XNAS:MELI&region=usa&culture=zh-TW&productcode=QS&cur=&urlCookie=8997523520&e=eyJhbGciOiJSU0EtT0FFUCIsImVuYyI6IkExMjhHQ00ifQ.eY-s57E4rNn2aO0mdtQy4usd4MgSf5udSvrSfPlx1CR8UvQL-J2fAl-VM8li_sYc2QXO6QycfEv8yVzZ2N7bvNHC1yYrw-7azD4-Pf7enaNTK3hrGGLRpuQvnb2fsYaVrl-rfNY9qF3MT8zv4yY_C5NnYALL7i3LU5WCtOqboUw.iwvYb9QzHz9tiTU6.b1EtzaNCVJLTwN7nrWWU9ZQn7_OGtfjIvpEdxG7NfHa1yz5DACf2DqQpY81QZyqOxd0tKNnorEdis7OdtDYff3cciQOYIv1UMV7KsWI5niMGxHHw1nh4ozFv3nYYdqLDS71TH6mxu-rpQGcH18aD8HBBdTvFussfYiSI7U88YebdZhlGyZVxBAiYvgZteGXZN1xQKJTWc1Z2pQPdzn9-KaIDqVz2XsG87r6LOGk.SkvwYrJFtA4f2pft6D_Jxg#EditorialPolicy')> </a></div><div class=ar_rel></div></div></div><div class=r_txt6><b> Business Strategy and Outlook </b>  05/11/2020 <br><p></p> MercadoLibre's long-term success depends on future transaction and payment volume growth, and we identify several favorable tailwinds. Thanks to external (increased COVID-related demand, smartphone ubiquity, increased wealth creation, underdevelopment payment industry infrastructure) and company-specific factors (product mix diversification, on- and off-platform payment technologies and shipping solutions), we believe MercadoLibre can capitalize on accelerating digital commerce trends in Latin America, despite lingering macro constraints volatility. <br><br> We estimate that there are more than 450 million Internet users across MercadoLibre's Latin America markets--representing Internet penetration of 70% compared with 95% in North America--and forecast 40-50 million new users during the next five years. This offers MercadoLibre opportunities to build on its base of 76 million unique active users. On top of that, we believe technology, free shipping, loyalty program, and branding investments--which could continue to weigh on near-term operating margins--will allow MercadoLibre to convert a high percentage of users into lifetime customers. <br><br> MercadoLibre's network effect should also extend into other services. We expect MercadoPago to benefit from increased marketplace volume, higher adoption rates, and extensions like mobile and off-platform payments, mobile wallets, P2P payments, credit, and other payment solutions. Coupled with MercadoEnvios' expanding third-party logistics, a wider base of large merchants, and classifieds/advertising enhancements, we forecast MercadoLibre's commerce and fintech fee take rates will average 12.6% and 3.3% over the next five years (compared with 7.9% and 3.1% over the past three years), supporting our positive moat trend rating. <br><br> MercadoLibre faces limited online retail competition in the region, with Amazon, eBay, and local players like B2W generating less unique visitors in its core markets, though there are several solid competitors in the payments segment. We believe MercadoLibre can withstand competition through mobile, payment, shipping, and loyalty solutions, each of which should attract merchants looking to expand in Latin America. <p><p></p><br><b> </b>  05/11/2020 <br><p></p> We've assigned MercadoLibre a wide moat because of its efficient online marketplaces and payment solutions, along with buyer and seller engagement metrics that indicate a strong network effect moat source, which have helped to solidify the firm's market leadership across Latin America. Consumers are drawn to MercadoLibre's online and mobile marketplaces, which offers a wide selection of products at competitive prices; this, in turn, makes the platform the most desirable and convenient marketplace for a growing number of sellers eager to list their merchandise and take advantage of the company's merchant and logistics solutions (evident in upward marketplace take-rate trends). We think the network effect is strongest on the MercadoLibre platform (where 90% of the listings are fixed price) and believe this key competitive advantage is enough to set the firm apart from competition, making it difficult for rivals to poach customers. <br><br> In our view, recent gross merchandise volume, revenue, and take rate trends lend support to the network effect underpinning our wide moat rating, which we expect to become more pronounced as consumers shift from brick-and-mortar retailers to e-commerce (a trend that will likely continue as the industry navigates COVID-19-related changes in consumer behavior). E-commerce accounts for a mid-single-digit percentage of Latin America's total retail volume in most of MercadoLibre's primary markets, well below the high-single-digit to low-double-digit average for most developed economies. Thanks to growing economic prosperity, improving telecommunications infrastructure, and a COVID-19-related shift to online commerce, we anticipate Latin America consumers will narrow the gap in Internet penetration (around 70%) with that of North America (roughly 95%) and drive the size of the e-commerce market to more than $125 billion (compared with around $60 billion today) by 2024. We anticipate a net addition of more than 40-50 million new Internet users across Latin America over the next five years, which will significantly broaden MercadoLibre's active base of 76 million unique active users. We also expect MercadoLibre to convert a higher portion of Internet users into lifetime customers, aided by continued investments in technology upgrades, mobile innovations, increased shipping capabilities, and brand awareness marketing. Additionally, we've been intrigued by MercadoLibre's decision to eliminate placement fees (which should entice sellers concerned about paying up-front fees for products that may not sell) and move to a simplified "freemium" final value fee structure in many markets, which promotes engagement from larger sellers and encourages the use of financing, shipping, and advertising services, which should keep its marketplace take rate in the low double digits over the medium term. <br><br> Similarly, MercadoLibre's online and offline fintech services benefit from a strong network effect. Offering secure and convenient payment settlement between sellers and buyers on and off the MercadoLibre platform, MercadoPago attracts more sellers if more buyers sign up to use the services; the more sellers offer MercadoPago's payment solutions, the more popular the service will become among buyers. We expect MercadoPago will benefit from higher marketplace volume, but another growth driver lies in off-platform adoption. MercadoPago processes more than 95% of the transaction volume on MercadoLibre, and we also see future growth opportunities in merchant services, financing, mobile payments (including a digital wallet, an in-app payments software development kit, and a mobile point-of-sale solution), and extending buyer and seller credit (namely, "interest-free" credit payment alternatives where consumers' financing charge is covered by a higher marketplace fee paid by the seller). With more than half of payment volume currently taking place off the company's marketplaces, we're constructive about MercadoPago's long-term growth opportunities and remain comfortable calling for average annual payment volume growth of more than 55% the next five years (with potential upside coming through collaboration with PayPal after its investment in MercadoLibre), including mobile point-of-sales systems (mPOS), QR in-store payment network, and peer-to-peer (P2P) payment enhancements). With these additional service offerings, we also expect payment take rates (payment fees as a percentage of total payment volume) to increase to more than 4% over the next 10 years, up from an average of 3% over the past three years. <br><br> We believe management's key growth priorities should position the company to capitalize on favorable trends in Latin America and enhance its network effect moat source in the process. Among these strategies are driving payment growth both on and off MercadoLibre, spreading its desktop e-commerce leadership to mobile; driving shipping adoption through MercadoEnvios, attracting new vendor segments (including online stores for consumer brands, manufacturers, and larger retailers); expanding vertical solutions to a growing number of product categories (379 million items were purchased on MercadoLibre's platform in 2019, up from 181 million three years ago, with a more meaningful increase in take-rate-accretive fashion/body care, home/outdoors, entertainment/hobbies listings); investing in the customer and seller experience across all MercadoLibre's platforms; and generating a developer-friendly open ecosystem. <br><br> Our analysis also shows that once an e-commerce platform reaches more than 10%-15% of its operating regions' population as active users, it becomes very difficult for competitors to unseat it and can lead to an extended period of excess economic returns. This is partly explained because a strong network effect can have a flywheel effect and drive growth in other adjacent business lines, such as membership and subscription services, online-to-offline services, and cross-border trade. We've already seen this play out for MercadoLibre with MercadoPago and expect to see greater traction with MercadoPago off-platform payment services (which grew 119% and helped to drive 54% growth in total payment volumes in 2019), MercadoEnvios (items shipped increased 39% in 2019), and advertising/classifieds business units. <p><p></p><br><b> <a href=//quicktake.morningstar.com/StockNet/StockValuation.aspx?Country=USA&Symbol=MELI&culture=zh-TW&productcode=QS&urlCookie=8997523520&e=eyJhbGciOiJSU0EtT0FFUCIsImVuYyI6IkExMjhHQ00ifQ.eY-s57E4rNn2aO0mdtQy4usd4MgSf5udSvrSfPlx1CR8UvQL-J2fAl-VM8li_sYc2QXO6QycfEv8yVzZ2N7bvNHC1yYrw-7azD4-Pf7enaNTK3hrGGLRpuQvnb2fsYaVrl-rfNY9qF3MT8zv4yY_C5NnYALL7i3LU5WCtOqboUw.iwvYb9QzHz9tiTU6.b1EtzaNCVJLTwN7nrWWU9ZQn7_OGtfjIvpEdxG7NfHa1yz5DACf2DqQpY81QZyqOxd0tKNnorEdis7OdtDYff3cciQOYIv1UMV7KsWI5niMGxHHw1nh4ozFv3nYYdqLDS71TH6mxu-rpQGcH18aD8HBBdTvFussfYiSI7U88YebdZhlGyZVxBAiYvgZteGXZN1xQKJTWc1Z2pQPdzn9-KaIDqVz2XsG87r6LOGk.SkvwYrJFtA4f2pft6D_Jxg> Fair Value and Profit Drivers </a> </b>  04/12/2020 <br><p></p> We are raising our fair value estimate for MercadoLibre to $1,300 per share from $1,020 due to a more optimistic near-term revenue growth forecast stemming from COVID-19-related market share gains and improved monetization potential. Previously, we had assumed that top-line growth would remain strong over the near future, but eventually fade to an average annual clip around 40% the next five years. However, based on new user attraction/retention trends and off-platform payment growth, we believe 48% average annual top-line growth over the next five years is possible, with payments and other financial technology revenue outpacing marketplace revenue. Based on third-quarter trends, we now anticipate almost 70% reported top-line growth in 2020, owing to 65% unique active user growth, an uptick in the company's commerce take rate (12.0% versus 9.6% a year ago) via new logistics monetization opportunities, reported payment volume growth of almost 80% due to increased engagement among existing users, and increased demand for nascent services such as mobile wallet. We believe management is committed to a better balance between growth and profitability, but we also think the opportunity to accelerate new avenues of growth during government-mandated lockdown periods may warrant near-term investments. This will likely include buyer/seller acquisition, brand marketing (including off-platform payments), product development, and logistics investments that will likely keep a lid on margins in 2020 and 2021. While payment momentum should drive modest gross margin expansion the next few years, it will be partly offset by logistics costs, product listing changes, incremental payment processing fees, and increased bad debt expenses (due to accounting changes). We now forecast 280 basis points of year-over-year gross margin contraction to 45.2% in 2020, but we expect it will return to the high-40s over time. Further, we forecast a mid-single-digit operating margin in 2020 after negative operating margins in 2018 and 2019, but we see a path to midteens operating margins over the next four years through take-rate monetization opportunities (payments and logistics) and improved operating leverage. In the long term, we forecast operating margins of at least 20% in 2026 and thereafter. <p></p><br><b> <a href=javascript:openDataDefs('//analysisreport.morningstar.com/analyst/stock/MorningstarAnalysis?&t=XNAS:MELI&region=usa&culture=zh-TW&productcode=QS&cur=&urlCookie=8997523520&e=eyJhbGciOiJSU0EtT0FFUCIsImVuYyI6IkExMjhHQ00ifQ.eY-s57E4rNn2aO0mdtQy4usd4MgSf5udSvrSfPlx1CR8UvQL-J2fAl-VM8li_sYc2QXO6QycfEv8yVzZ2N7bvNHC1yYrw-7azD4-Pf7enaNTK3hrGGLRpuQvnb2fsYaVrl-rfNY9qF3MT8zv4yY_C5NnYALL7i3LU5WCtOqboUw.iwvYb9QzHz9tiTU6.b1EtzaNCVJLTwN7nrWWU9ZQn7_OGtfjIvpEdxG7NfHa1yz5DACf2DqQpY81QZyqOxd0tKNnorEdis7OdtDYff3cciQOYIv1UMV7KsWI5niMGxHHw1nh4ozFv3nYYdqLDS71TH6mxu-rpQGcH18aD8HBBdTvFussfYiSI7U88YebdZhlGyZVxBAiYvgZteGXZN1xQKJTWc1Z2pQPdzn9-KaIDqVz2XsG87r6LOGk.SkvwYrJFtA4f2pft6D_Jxg#risk')> Risk and Uncertainty </a> </b>  05/11/2020 <br><p></p> Favorable income growth and Internet adoption secular trends suggest strong future cash flow growth for MercadoLibre, but the nascent stage of e-commerce in Latin America, where online and mobile transaction engagement is lower than developed markets, along with ongoing free shipping and loyalty-program initiative investments, makes it more challenging to forecast the firm's cash flow growth and return on invested capital. Additionally, MercadoLibre often depends on the transportation infrastructure and delivery systems in local markets to facilitate transactions among buyers and sellers, where any prolonged disruption (including future postal carrier or trucker strikes) or rate hikes (which have occasionally been put in place by Brazil national postal carrier Correios) could disrupt gross merchandise volume trends, even as the company builds out its own fulfillment network. Macroeconomic uncertainty, high inflation, indirect exposure to global commodities demand, and political turmoil in certain markets can also influence future free cash flow projections. MercadoLibre's push into off-platform payment solutions could require additional regulatory oversight and expose the company to increased bad debt expenses. The company is also subject to currency swings, the result of operating in more than a dozen countries but reporting in U.S. dollars. We also expect coronavirus-related changes in consumer behavior will have a lasting impact on the industry while also driving near-term operating volatility. <p></p><br><b> Stewardship </b>  04/12/2020 <br><p></p> We've assigned MercadoLibre a Standard equity stewardship rating. Cofounder, chairman, and CEO Marcos Galperin has been keeper of the flame since the company's inception in 1999. In our view, Galperin and CFO Pedro Arnt deserve credit for guiding MercadoLibre through a period of rapid expansion across multiple Latin American markets over the past two decades. We would prefer to see the roles of chairman and CEO split to give the board more independence in setting strategies and evaluating the performance and compensation of management, though we have not witnessed any abuses of power under this structure. There are five independent directors on the eight-member board. Galperin owns about 10% of MercadoLibre's outstanding shares, which we believe is sufficient to align his interests with those of shareholders. <br><br> We view management's strategic priorities (mobile technologies, payment and logistics enhancements, loyalty platforms, and customer acquisition and retention) as appropriate, as MercadoLibre's increasingly scalable business model and operating expense discipline (particularly with respect to headcount) enable investment in these critical areas. We expect customer acquisition and retention efforts will be crucial as the company looks to satisfy increasing demand in its earlier-stage markets like Colombia, Chile, Peru, and Uruguay. While we expect heavy investment over the near term, we expect MercadoLibre to generate solid cash flows over the foreseeable future while maintaining a healthy balance sheet. The firm does not issue dividends or repurchase its shares as it has significant opportunities to invest in operations. <p></p><br><b> </b><br><br><p><span class="str gry"> :  </span></p> Founded in 1999, MercadoLibre's commerce segment (representing around 52% of net revenue in 2019) includes online marketplaces in more than a dozen Latin American countries, display and paid search advertising capabilities (MercadoClics), online store management services (MercadoShops), and third-party logistics solutions (MercadoEnvios). Its fintech segment includes an online/offline payment-processing platform (MercadoPago), mobile wallet platform, credit solutions for buyers/sellers, and asset management offerings (Mercado Fondo). The company derives more than 95% of its revenue from Brazil, Argentina, and Mexico. <p></p><br></div></div>