Latin America is home to over 600 million people, nearly double the size of the U.S. population. However, its internet penetration levels remain well below that of the U.S. despite growing substantially in recent years and continue to expand at a fast pace. We take a look at two companies, the largest e-commerce player in this market and a payment solution provider that will benefit from the shift to digital and a largely unbanked population.

Although Latin America provides a vast opportunity for companies it also carries risks. Political tensions and instability in the region are perhaps the biggest risks and can impact the companies negatively. Currency fluctuations and slow economic growth are other factors that investors need to be aware of.

MercadoLibre Bull and Bear Case:

MercadoLibre (NASDAQ: MELI) is the e-commerce king and also operates a payments division MercadoPago. It recently reported its Q3 results and smashed analysts' expectations reporting impressive growth in all divisions.

Its e-commerce division has fended off competition from tech giants Amazon and Alibaba controlling the majority of the market share in the region. E-commerce penetration across many of the countries in Latin America has expanded significantly but remains in the single digits leaving a long runway for growth. COVID-19 has led to increased e-commerce sales which have persisted despite the gradual reopening of physical stores. The e-commerce division reported a record 35 million unique buyers on the platform, and gross-merchandise-volume grew by 62.1% to $5.9 billion year-over-year (YoY).

Mercado Pago has continued its strong growth with a total-payment-volume (TPV) of $14.5 billion up 92% YoY, facilitating 60 million unique payers in the quarter. This segment was initially introduced to facilitate payments on the e-commerce platform but is now widely used in shops across the region.

In Q3, MercadoLibre reported revenue growth of 85% on a currency-neutral basis. Fintech revenue grew 52% year-over-year to $391.2 million. It also reported a gross profit of $480 million despite a gross margin that declined slightly due to shipping costs. 

The company also has an impressive company culture with high ratings on Glassdoor along with being named in the "World's 25 Best Workplaces" by Fortune magazine in 2020.

Although there is a lot to like about MercadoLibre, there are some risks as well. Competition from Amazon remains a risk, particularly in markets such as Mexico where Amazon has invested heavily in recent years. A downturn in Brazil could also be very costly, given that it accounts for a large portion of revenue. However, due to its size and management, it is likely to be able to navigate political and economic challenges in the future.

StoneCo Bull and Bear Case:

StoneCo is a payment solution provider that enables merchants to conduct business across many channels and has been dubbed the "Square of Brazil". This company is relatively new to the public markets having IPO'd in 2018 and is backed by legendary investor Warren Buffett. The company took a hit due to COVID-19, however, has rebounded strongly and reported record results in Q3.

StoneCo is capitalizing on an underbanked market in Brazil and also has its sights set on the broader market of Latin America where it is estimated that 49% were unbanked before COVID-19. Brazil alone is currently the fourth largest mobile point-of-sale payments market behind the U.K, U.S., and China.

In the latest quarter, StoneCo reported revenue growth of 39% to $162.7 million, and TPV jumped by 114% YoY. These strong results are despite Brazil being heavily impacted by COVID-19. It added 63,000 new clients in the quarter, up 26% YoY bringing the total to 582.9 thousand.

It also boasts an impressive net promoter score of 72 in Q1 of 2020, and although management didn't revise this in the last quarter, they stated that it continues to increase. StoneCo continues to evolve as a business to become a complete financial platform, engaging users through multiple services. This increases stickiness and creates a competitive advantage over the long-term. 

StoneCo also faces the risks that have been outlined above due to the market in which it operates. Economic hardship is currently the risk that is most prevalent with StoneCo relying on many small and medium-size businesses to generate revenue. It will also face some tough competition from other payment providers, Mercado Pago being one. This company is likely to be volatile but would be an excellent addition for investors with a relatively high-risk tolerance.

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