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Mercadolibre (MELI) Valuentum Retail Equity Research Visit us at www.valuentum.com Ratings as of 10-Sep-2021 Data as of 9-Sep-2021 Mercadolibre MELI FAIRLY VALUED Buying Index™ 6 Value Rating Economic Castle Estimated Fair Value Fair Value Range Investment Style Sector Industry Very Attractive $1887.00 $1415.00 - $2359.00 LARGE-CAP BLEND Next Generation Disruptive Innovation We've raised our fair value estimate (again) for Mercadolibre as its e- Investment Considerations commerce, payment solutions, and logistics operations have been firing on all- DCF Valuation FAIRLY VALUED cylinders of late. Relative Valuation UNATTRACTIVE Stock Chart (weekly) ValueCreation™ EXCELLENT ValueRisk™ MEDIUM 25,000,000 1,973.00 ValueTrend™ POSITIVE 1,873.00 Cash Flow Generation STRONG 20,000,000 1,773.00 Financial Leverage HIGH 1,673.00 15,000,000 Growth AGGRESSIVE 1,573.00 Technical Evaluation BULLISH 1,473.00 10,000,000 1,373.00 Relative Strength STRONG 5,000,000 1,273.00 Money Flow Index (MFI) NEUTRAL 1,173.00 Upside/Downside Volume (U/D) BULLISH 0 1,073.00 Near-term Technical Support, 10-week MA 1769.00 DCF = Discounted Cash Flow; MFI, U/D = Please see glossary. MA = Moving Average Business Quality ValueCreation™ The week with the highest trading volume out of the last 30 weeks was a week of heavy selling, or distribution (red bar). ValueRisk™ Very Poor Poor Good Excellent Company Vitals Investment Highlights Low Market Cap (USD) $93,682 • Mercadolibre is the largest e-commerce ecosystem in Avg Weekly Vol (30 wks) 2,082 Latin America. The company benefits from positive Medium 1 30-week Range (USD) 1262.38 - 1970.13 demographic/income trends and rising internet Valuentum Sector Next Generation penetration in the region. The firm was founded in High 5-week Return 1.8% 1999 and is headquartered in Argentina. It suspended its dividend in 2018 to focus on other, more 13-week Return 28.2% opportunistic investments. Very High 30-week Return 0.3% Firms that generate economic profits with little operating variability score near the top right of the matrix. Dividend Yield % 0.0% • The company operates a high-margin and strong Dividends per Share 0.00 cash-generating business. Its brand is well-known, and Relative Valuation Forward P/E PEG Price / FV Forward Dividend Payout Ratio 0.0%the firm boasts a strong marketplace business in Latin Monster Beverage 36.3 2.7 95.4% Est. Normal Diluted EPS 20.68America. It has a huge opportunity for growth, though Roku 720.3 NMF 97.3% it operates in economically volatile markets. P/E on Est. Normal Diluted EPS 91.1 Wayfair 60.1 7.5 86.7% Est. Normal EBITDA 1,906• The firm aims to keep growing the penetration of its Zoom Video 64.5 3.5 83.0% Forward EV/EBITDA 199.8payments, shipping and financing solutions as Peer Median 62.3 3.5 91.0% strategic facilitators of e-commerce both on and off its EV/Est. Normal EBITDA 47.9 Mercadolibre NMF NMF 99.8% platforms, persistent development of its mobile Forward Revenue Growth (5-yr) 31.9% Price / FV = Current Stock Price divided by Estimated Fair Value product offering, category-specific verticalization Forward EPS Growth (5-yr) -569.5% capabilities to gain wallet share, and continuing to Financial Summary ----- Actual ----- Projected NMF = Not Meaningful; Est. = Estimated; FY = Fiscal Year expand and develop its relationship with large retail Fiscal Year End: Dec-19 Dec-20 Dec-21 Returns Summary 3-year Historical Average brands. Revenue 2,296 3,973 6,853 Return on Equity -8.5%• Growth in key areas of Mercadolibre's business has Revenue, YoY% 59.4% 73.0% 72.5% Return on Assets -2.3%been explosive in recent years. GMV has grown at a Operating Income -153 128 276 ROIC, with goodwill 46.6%robust pace of late. Economic uncertainty in key Operating Margin % -6.7% 3.2% 4.0% ROIC, without goodwill 50.3%markets can impact results. Additionally, Amazon Net Income -172 -1 127 ROIC = Return on Invested Capital; NMF = Not Meaningful seeks to grow its Brazilian operations and could prove Net Income Margin % -7.5% 0.0% 1.8% to be a significant competitor in an important market. Leverage, Coverage, and Liquidity Diluted EPS -3.53 -0.02 2.49 In Millions of USD • The Latin American e-commerce industry is growing Diluted EPS, YoY % 325.1% -99.4% NMF Total Debt 1,409at a brisk clip and the industry’s promising outlook Free Cash Flow (CFO-capex) 314 936 1,413 Net Debt -2,340underpins our optimistic assumptions regarding Free Cash Flow Margin % 13.7% 23.6% 20.6% Total Debt/EBITDA 6.0 Mercadolibre’s future revenue growth and potential In Millions of USD (except for per share items) room for margin expansion. Net Debt/EBITDA NMF LARGE-C EBITDA/Interest 2.2 Structure of the Financial Tech Services Industry EXCELLENT Current Ratio 1.5 The financial tech services industry is primarily composed of firms that generate revenue by charging fees to customers for Quick Ratio 1.0 providing transaction processing and other payment-related services. Constituents operate in a rapidly-evolving NMF = Not Meaningful legal/regulatory environment, particularly with respect to interchange fees, data protection, and information security. Several participants benefit from a significant competitive advantage – the network effect. As more consumers use credit/debit cards, more merchants accept them, thereby creating a virtuous cycle. The industry is one of the most attractive in our coverage. The information and data contained in this report is not represented or warranted to be timely, complete, accurate, or correct. This report is for informational purposes only and should not be considered a solicitation to buy or sell a security. Before acting on any information in this report, you should consider whether the information is suitable for your particular circumstances and, if necessary, seek professional advice. Assumptions, opinions, and estimates are based on our judgment as of the date of the report and are subject to change without notice. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this report. Redistribution is prohibited without written permission. To license Valuentum research, contact us at [email protected]. Page 1 Valuentum Retail Equity Research (10=best) Data as of 9-Sep-2021 Mercadolibre MELI FAIRLY VALUED Buying Index™ 6 Value Rating Economic Castle Estimated Fair Value Fair Value Range Investment Style Sector Industry Very Attractive $1887.00 $1415.00 - $2359.00 LARGE-CAP BLEND Next Generation Disruptive Innovation Economic Profit Analysis ValueCreation™ EXCELLENT Adjusted Return on Invested Capital (ROIC) The best measure of a firm's ability to create value for shareholders is expressed by comparing its return on invested capital (ROIC) with its weighted average cost of 200.0% capital (WACC). The gap or difference between ROIC and WACC is called the firm's 180.0% economic profit spread. Mercadolibre's 3-year historical return on invested capital 176.0% (without goodwill) is 50.3%, which is above the estimate of its cost of capital of 9.1%. 160.0% As such, we assign the firm a ValueCreation™ rating of EXCELLENT. In the chart to 140.0% the right, we show the probable path of ROIC in the years ahead based on the estimated 118.1% volatility of key drivers behind the measure. The solid grey line reflects the most likely 120.0% outcome, in our opinion, and represents the scenario that results in our fair value estimate. 100.0% 79.0% ROIC - WACC Spread, 3-year historical average 41.2% 80.0% 60.3% ROIC - WACC Spread, 5-year projected average 87.4% 60.0% 50.1% These spreads equal the firm's annual average ROIC (excluding goodwill) less its WACC. 40.0% ValueTrend™ POSITIVE 21.8% Mercadolibre receives a ValueTrend™ rating of POSITIVE, which is based on the 20.0% company's trailing three-year performance. The firm's ROIC (excluding goodwill) WACC, 9.1% 0.0% increased to 79% last year from its trailing 3-year average of 50.3%. We expect ROIC (excluding goodwill) to be in the ballpark of about 118% by the end of our discrete forecast period, with upside potential to about 176% over that time period. Weighted Average Cost of Capital (WACC) The graph above shows the firm's ROIC (excluding goodwill) compared with historical averages and its WACC. Adjusted ROIC Calculation ---------- Actual ---------- Capital Structure 1.5% Equity Fiscal Year End: Dec-18 Dec-19 Dec-20 Debt Preferred Earnings before Interest Operating Income after Depreciation -70 -153 128 - Adjusted Taxes (at 25% of EBIT) -18 -38 32 + Amortization 0 0 0 98.5% + Non-cash Operating Items 222 550 1,079 - Minority Interest 0 0 0 Earnings before Interest 170 435 1,175 Cost of Equity Invested Capital Risk Free Rate Assumption4.3% Inventories 0 0 0 Fundamental Beta (ERP multiplier)0.8 + Receivables 0 0 0 Estimated Equity Risk Premium6.5% + Current Deferred Income Taxes 0 0 0 Cost of Equity Assumption 9.2% + Other Current Assets 585 741 1,598 + Property, Plant and Equipment, Net 166 244 392 After-tax Cost of Debt + Goodwill, Net (Cost in Excess) 89 88 85 Risk Free Rate Assumption4.3% + Intangibles 0 0 0 Synthetic Credit Spread5.00% + Non Current Deferred Income Taxes 0 0 0 Cost of Debt Assumption9.3% - Accounts Payable 0 0 0 Cash Tax Rate Assumption25.0% - Other Current Liabilities 0 0 0 After-tax Cost of Debt Assumption 7.0% Invested Capital, with goodwill 840 1,073 2,075 Cost of Preferred Stock Invested Capital, without goodwill 751 985 1,990 Preferred Dividends 0 Value of Preferred Stock 0 Return on Invested Capital, with goodwill 19.5% 45.5% 74.7% Cost of Preferred Assumption NA Return on Invested Capital, without goodwill 21.8% 50.1% 79.0% In Millions of USD Weighted Average Cost of Capital (WACC) 9.1% Note: Valuentum may provide an adjusted ROIC measure to better reflect the economic substance ERP = Equity Risk Premium of a company's operations, as in the case of companies with negative invested capital.
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