The declining valuations of major technology companies, including a host of recent IPOs, were partially triggered by lackluster guidance. As we saw this morning with Upstart, guidance can trump trailing results when it comes to setting investor sentiment about any particular company.
For one company currently in the public market penalty box, however, the picture is harder to parse. Mercado Libre ($MELI), after reporting earnings last week, has seen its value sharply contract. On May 4, Mercado Libre closed at $1,023.21 per share. On May 5, the day it reported its first-quarter performance, shares of the company closed at $913.22 apiece. Yesterday, the company’s stock slipped to a close of just $770.99.
The Exchange explores startups, markets and money.
Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.
And that’s after Mercado Libre posted greater-than-expected Q1 2022 revenue growth. Why the decline in value if the company’s recent results weren’t too poor? Mercado Libre’s remarks about its market indicate that it is facing uphill conditions stemming from a number of sources, including consumer spending, rising interest rates, foreign exchange and inflation pressures.
Mercado Libre, a Latin American e-commerce and fintech company, went public in 2007, making it an older public company. But its results provide a fascinating look inside the digital commerce and financial technology industries in a wealth of Latin American countries, making its results, and investor response, incredibly important.
How so? The Exchange has tracked Latin American startup and venture capital activity for some time. The numbers have been astounding. How their underlying market performs is therefore a critical data point; if the technology market in the region is in decline, it could slow the growth of a host of startups and billions worth of invested capital.
What then can we learn from Mercado Libre’s earnings report and ensuing valuation decline? It’s not a simple question. Let’s explore.
Mercado Libre’s Q1 2022 results
In the first quarter of 2022, Mercado Libre reported net revenues of $2.25 billion, up 63% from a year-ago result of $1.38 billion. The company’s gross profit crested the $1 billion mark, allowing Mercado Libre to post $139 million worth of operating profit and $65 million worth of net income. Each figure was an improvement from year-ago results.
Quick growth and rising profitability are hardly a poor mix of results. So how did Mercado Libre perform compared to expectations? Better in revenue terms, with the street only anticipating $2.01 billion worth of top line. However, when it came to per-share profit, the company’s $1.30 in earnings was under an anticipated $1.66 per share.
Sticking to good news for now, Mercado’s net fintech revenues expanded from $467 million in Q1 2021 and $773 million in Q4 2021 to $971 million in the first quarter of this year. Take rate for fintech products ticked up as well, while total payment volume rose 81% on a year-over-year basis (FX neutral) to $25.3 billion, with transactions rising 73% to 1.1 billion, again compared to the year-ago quarter.
It’s a solid set of results, yeah? So let’s flip the coin and look at the issues that could be the cause of Mercado Libre’s falling share price, and what problems it could pose for Latin American startups.
What’s the bad news?
Despite fairly strong results, Mercado Libre isn’t exactly exuding confidence. Its letter to shareholders warns that the company is “facing a challenging backdrop with uncertainty surrounding consumer spending, higher interest rates and higher inflation.”
Higher inflation is something Mercado Libre already had to face in its main market, Brazil. Between May 2021 and now, the target for the Brazilian federal funds rate (Selic) rose from 2.75% to a whopping 12.75% a year.
The foreign currency environment has also proven more challenging for Mercado Libre than for its American peers. Per the company’s account, it wasn’t particularly hard in Q1 2022. “The foreign currency losses in the quarter were only three million dollars,” as difficulties caused by Argentinian restrictions on buying dollars were “partially offset by Brazilian Real appreciation.” But it is still one more factor that the listed company needs to deal with.
The challenges facing Mercado Libre are common to many companies around the world, but it doesn’t make them less problematic. Arguably, this is even more difficult for companies operating in emerging economies, where individual customers with limited incomes can be more price sensitive.
During the Q&A session that followed Mercado Libre’s earnings call, an analyst asked how Mercado Libre was thinking about price elasticity while pushing cost pressures onto end customers. Mercado Libre CFO Pedro Arnt replied that the company already passed on some of these costs, while still managing “to grow at a healthy clip.”
Going forward, Arnt added, Mercado Libre “will continue to try to find the right balance of being able to push through cost increases and finding the right mix of elasticity so that we don’t slow down the business more than what makes sense, given how much opportunity still lays ahead of us.”
Risks and opportunities often go hand in hand, especially in Latin America’s tech sector. Expanding into credit is one of these risky moves that could pay off for Mercado Libre, but is also exposing it to loan defaults. Default rates are already high in the region and could increase as customers face more pressure with the added uncertainty of new offerings such as BNPL.
BNPL in Latin America is different from BNPL in other markets, though. “We charge for that because interest rates are higher,” Mercado Pago CEO Osvaldo Gimenez said in the earnings call. (Mercado Pago is Mercado Libre’s payments arm.)
Mercado Libre wasn’t born yesterday, and this experience surely helps it deal with Latin America’s levels of uncertainty and weather global crises. In a 2021 episode of the “Twenty Minute VC” podcast, Mercado Libre’s former CEO, Marcos Galperin, recalled how the company was in the middle of raising its second round of funding when the dot-com bubble burst and how it was pricing its IPO in 2007 when the financial crisis started.
Today, the company is “coming out of the pandemic period stronger than we were two years ago,” it told its shareholders. Few companies can say as much — but the fact that this is not enough to prevent share-price declines is a warning for everyone.
What’s ahead for Latin American startups?
We have two perspectives for Latin American startups in the wake of a closer read of Mercado Libre’s earnings results. The first is that macro headwinds could have a material impact on both fintech and e-commerce companies in the region. Mercado Libre’s worries will also impact smaller companies, but perhaps more so; smaller concerns won’t have similar economies of scale and perhaps enjoy lower pricing leverage on suppliers and consumers.
The second deals with acquisitions. One element of the changing startup market we find ourselves in is the anticipation that M&A activity will increase between large technology companies and smaller startups perhaps facing a more difficult fundraising market.
(Mercado Libre has a corporate venture capital arm, and we anticipate that such investing mechanisms will juice startup M&A this year.) However, Arnt, as quoted by Bloomberg, said that in today’s market, “cash is absolutely king,” making it “even more likely that we will continue to stick to [his company’s] preference to build,” rather than buy, other companies.
Even more, Mercado Libre stressed ambitious hiring plans for the year (more than 13,000 staffers, per the company), further indicating that it isn’t in the market for buying smaller companies for talent’s sake.
If Mercado Libre intends to use its cash to hire instead of buy, it closes the door on a number of potential deals that might have been; the company is not indicating to its investors that it is open to a number of deals. It’s a data point to hear this from Mercado Libre; if other companies of similar scale in Latin America share its posture, the larger M&A market in the region could prove slim this year.
Add in a largely closed global IPO window, and Latin American startups are staring down valuation resets, macro matters and potentially constrained M&A opportunities. That’s a tough mix for any market, let alone one that saw so very much capital so recently deployed before a recent slowdown.