Is MercadoLibre Amazon's Biggest Threat?

MercadoLibre (NASDAQ: MELI) -- or "free market" in Spanish -- is an e-commerce company founded in 1999 by Marcos Galperin and Hernan J. Kazah. While attending Stanford in 1999, Galperin convinced John Muse of the Hicks Muse Private Equity Fund to invest in MercadoLibre. Galperin is the current CEO of the company.

The service is the largest e-commerce platform in Latin America -- called by many the Amazon (NASDAQ: AMZN) or eBay (NASDAQ: EBAY) of Latin America. The company is divided into six business units encompassing everything from advertising, credit, shipping, and a payment processing solution, MercadoPago.

MercadoPago is a huge success, and processed $19.72 billion in transactions between Q1 and Q3 of 2019, of which more than half were for "non-marketplace transactions." As a result, MercadoLibre has had fantastic growth, nearly doubling in valuation to over $30 billion in the same period.

The reason for this success is simple. 70% of Latin America's population doesn't have a bank account and about half don't own a credit card. With MercadoPago, people can use mPOS (mobile point of sale) machines to replenish their accounts with traditional methods (like bank cards and transfers) and less conventional methods (such as cash or crypto-currency like Bitcoin). MercadoPago became so popular that vendors outside of MercadoLibre started accepting it and people use the service to buy everything from electronics to groceries and gas.

The future looks bright for MercadoLibre. Latin America's e-commerce market is estimated to more than double in value from $101 billion to $210 billion by 2022 as more people are getting on the Internet and acquiring mobile phones. The number of mobile users is expected to grow to 73% of the population by 2025. As Latin America's top e-commerce site, MercadoLibre is poised to reap the benefits of this market growth.

E-commerce in Latin America is not without challenges. Aside from a high non-banking population, there are logistical issues. Companies need to invest in infrastructure that would enable faster delivery, an important aspect in customer satisfaction.

Having a home-court advantage puts MercadoLibre in a unique position to keep competition at bay. Last year, the company added to its infrastructure by opening distribution centers in Brazil, Argentina, and Mexico to speed up deliveries. It also has many mPOS machines throughout Latin America that work with MercadoPago, a payment system that doesn't work with Amazon. With its robust logistics operation, it has an upper hand on Amazon. However, outside of Latin America, it poses no threat to the e-commerce juggernaut yet. Another big name competitor is Shopify Inc. (NYSE: SHOP) for MercadoShops, but outside of Argentina, it loses to Shopify in nearly all categories.

The company keeps growing and improving. This year, it plans to invest $718 million to improve financial services and logistics in Brazil. One analyst predicts that Amazon could purchase MercadoLibre in the near future. This makes sense as competing with the company would cost Amazon too much, as it would have to set up a shipping and payment infrastructure in Latin America to do so.

Is MercadoLibre Amazon's Biggest Threat?

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