MELI MercadoLibre Inc (Stock Report)

Morningstar Equity Analyst Report | Report as of 14 Aug 2023 23:04, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NASDAQ - ALL MARKETS Page 1 of 24
MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
1,296.52 USD 1,260.00 USD 1.03 66.62 USD Bil Wide 3 Large Growth Very High Exemplary ;;;;;
14 Aug 2023 14 Aug 2023 22:55, UTC 11 Aug 2023 5 Jul 2023 05:00, UTC
Price vs. Fair Value
Last Close: 1,296.52

2000 Fair Value: 1,260.00
14 Aug 2023 22:55, UTC
1500 Over Valued

Under Valued
1000
500
0
2018 2019 2020 2021 2022 YTD
Analysis
0.86 1.14 1.29 0.77 0.74 1.03 Price/Fair Value
-6.93 95.30 192.90 -19.51 -37.24 53.21 Total Return %
Morningstar Rating
Total Return % as of 14 Aug 2023. Last Close as of 14 Aug 2023. Fair Value as of 14 Aug 2023 22:55, UTC.
Contents
Business Description MercadoLibre's Sprawling Commerce and Fintech Ecosystem
Business Strategy & Outlook (14 Aug 2023)
Bulls Say / Bears Say (14 Aug 2023) Underpin Durable Competitive Position
Economic Moat (14 Aug 2023)
Fair Value and Profit Drivers (14 Aug 2023)
Business Strategy & Outlook Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023
Risk and Uncertainty (14 Aug 2023)
MercadoLibre has positioned itself as a one-stop e-commerce solution for Latin American buyers and
Capital Allocation (14 Aug 2023)
Analyst Notes Archive sellers. It has developed a comprehensive ecosystem of mutually reinforcing services, with its core
Financials marketplace supported by a payments and lending arm (Mercado Pago and Mercado Credito), a best-in-
ESG Risk breed shipping solution (Mercado Envios), and an increasingly robust advertising platform. With
Appendix
effectively all the firm's platform gross merchandise volume funneled through proprietary payment rails
Research Methodology for Valuing Companies
and more than 94% of items sold shipped managed through Envios, the marketplace operator has
Important Disclosure
effectively addressed two of the biggest pain points in e-commerce.
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and
Investment Research Policy. For information regarding conflicts of interest, please MercadoLibre's strategy lines up closely with that of the largest global e-commerce players: attracting
visit: http://global.morningstar.com/equitydisclosures.
users to the platform with shipping subsidies and membership rewards, offering sellers a simple and
The primary analyst covering this company does not own its stock.
convenient user interface to ease listing friction, and reducing incentives to multihome for all platform
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
Rating. participants as fulfillment speeds grow quicker and per-unit shipping costs fall further. We expect
platform monetization to increase gradually and anticipate that swelling customer expectations around
quick shipping times, increasing fulfillment penetration, and expanding small merchant credit tied to
platform sales should render MercadoLibre's services increasingly sticky.
We appreciate the company's gradual move toward faster-moving consumer goods, grocery
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ß
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Morningstar Equity Analyst Report | Report as of 14 Aug 2023 23:04, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 2 of 24
partnerships, and first-party sales, particularly as a cohort of customers maintain COVID-19-driven
Sector Industry purchasing habits outside the traditional e-commerce decision set. While these products see lower
t Consumer Cyclical Internet Retail average selling prices, they lend themselves to repeat purchase behavior, better positioning
Business Description
MercadoLibre to compete for customers' first online product search—driving better conversion rates
MercadoLibre runs the largest e-commerce marketplace and improved advertising monetization.
in Latin America, connecting a network of more than 148
million active users and 1 million active sellers as of the We view the firm's main challenges moving forward as consistent with those of the past; increasing
end of 2022 across an 18-country footprint. The company fulfillment penetration, generating operating leverage in shipping and payments solutions, and
also operates a host of complementary businesses, with continuing to improve the user experience on the platform, driving barriers to success higher for
shipping solutions (Mercado Envios), a payment and
competitors.
financing operation (Mercado Pago and Mercado
Credito), advertisements (Mercado Clics), classifieds, and
Bulls Say Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023
a turnkey e-commerce solution (Mercado Shops)
rounding out its arsenal. MercadoLibre generates
u Surging digital payment adoption and increasing acceptance of online shopping should underpin a
revenue from final value fees, advertising royalties, durable secular growth narrative for MercadoLibre.
payment processing, insertion fees, subscription fees, u The scaling of a first-party sales business allows MercadoLibre to compete more effectively during key
and interest income from consumer and small-business holiday seasons, with strategic discounts of anchor products.
lending.
u Consumer and small-business lending addresses a key pain point in traditional financial-service
offerings while tying merchants and customers more closely to the MercadoLibre platform.
Bears Say Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023

u Government-funded solutions outside of conventional ACH transfers and debit payments, particularly in
Brazil (Pix), could apply downward pressure to take rates in the fintech business.
u A devaluation of the Argentine peso would severely curtail that region's contribution to sales growth
(though operating income and net income remain largely hedged).
u Linguistic, trade, and cultural idiosyncrasies complicate cross-border selling in the region, resulting in
the maintenance of separate marketplace properties in each country.
Economic Moat Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023

Global e-commerce is intensely competitive, marked by low barriers to entry, readily available price
comparisons for standardized products, and constant jockeying for differentiation based on ease of
search, fulfillment speed, breadth of product selection, and auxiliary services. In our view, operators that
can carve out moats generally develop a self-reinforcing network of buyers and sellers on their
platforms, deriving a competitive advantage from access to unique inventory that's difficult to
multihome, building a local network around a particular niche or customer group, or by offering a
comprehensive value proposition that includes some combination of payment and lending solutions,
fulfillment, first-party inventory, and customer-facing services. Further, while e-commerce markets
naturally lend themselves to multihoming, operators may develop switching costs by warehousing and
shipping third-party products, by offering a better return on advertising spending than competitors, and
ß
Competitors
Alibaba Group Holding Ltd Ordinary Shares
MercadoLibre Inc MELI Amazon.com Inc AMZN PayPal Holdings Inc PYPL
09988
Fair Value Fair Value Fair Value

Last Close 150.00 135.00 124.00
1,296.52 Uncertainty : High Uncertainty : High Uncertainty : High
Fair Value Last Close Last Close
1,260.00 140.57 63.27 Last Close
Uncertainty : Very High 92.80
Analysis Security 1 Security 2 Security 3 Security 4
Economic Moat Wide Wide Narrow Wide

Currency USD USD USD HKD
Fair Value 1,260.00 14 Aug 2023 22:55, UTC 150.00 4 Aug 2023 02:13, UTC 135.00 1 Jul 2022 02:04, UTC 124.00 20 Jul 2023 12:41, UTC
1-Star Price 2,205.00 232.50 209.25 192.20
5-Star Price 630.00 90.00 81.00 74.40
Fairly Valued 13 Aug 2023 Fairly Valued 14 Aug 2023 Significantly 14 Aug Under Valued 13 Aug 2023
Assessment
Undervalued 2023
Morningstar Rating QQQ14 Aug 2023 22:57, UTC QQQ14 Aug 2023 21:16, UTC QQQQQ14 Aug 2023 21:16, UTC QQQQ14 Aug 2023 16:28, UTC
Analyst Sean Dunlop, Equity Analyst Dan Romanoff, Senior Equity Analyst Brett Horn, Senior Equity Analyst Chelsey Tam, Senior Equity Analyst
Capital Allocation Exemplary Exemplary Standard Exemplary
Price/Fair Value 1.03 0.94 0.47 0.75
Price/Sales 5.67 2.65 2.45 2.05
Price/Book 29.58 8.47 3.44 1.77
Price/Earning 89.14 109.85 17.24 21.84
Dividend Yield 0.04% — — —
Market Cap 66.62 Bil 1,428.08 Bil 67.57 Bil 1,890.73 Bil
52-Week Range 754.76—1,388.39 81.43—146.57 58.95—103.03 60.25—118.50
Investment Style Large Growth Large Growth Large Core Large Core
by providing merchants and buyers with credit services, particularly in emerging markets with lower
financial-services penetration. In our view, MercadoLibre has built a wide economic moat around its
Latin American e-commerce ecosystem (implying excess returns over 20 years), benefiting from a
quickly growing network of buyers and sellers on its platform, privileged access to consumer transaction
data, and switching costs as sellers and buyers increasingly depend on the firm's broadening suite of
services (including the core marketplace, shipping solutions, classified ads, mobile payments, and digital
advertisements). Our average goodwill-adjusted return on invested capital forecast of 60% through 2032
embodies this view, handily outpacing our weighted average cost of capital estimate of 13% for the
firm.
We view a network effect as MercadoLibre's principal moat source, and the key advantage
underpinning its commerce segment (representing roughly 68% of 2022 consolidated revenue). In our
view, the platform grows stronger as new users are onboarded to both sides of the marketplace, with
sellers benefiting from quicker inventory turnover and access to a larger pool of potential customers,
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while buyers benefit from better search engine optimization, breadth of selection, and lower shipping
costs. Consequently, more buyers on the platform encourages further seller participation, while a
deeper pool of sellers adds stock-keeping units, lowers search costs for customers, and entices more
buyers to join the platform in a positive feedback loop.
The firm's marketplace and payment platforms connected some 148 million active buyers and more than
a million active sellers across 18 national markets in 2022, implying that more than 20% of Latin
Americans and just shy of 30% of Latin American internet users transacted through the marketplace or
Mercado Pago properties during the year (per our calculations and World Bank data). Importantly,
MercadoLibre has been able to effectively monetize its network, seeing commerce revenue grow at a
54% CAGR between 2018 and 2022 (against a 29% gross merchandise volume CAGR during that period),
with increased advertising penetration, strategic price increases, and fulfillment services offering
material upside for incremental monetization through our explicit forecast (which sees third-party take
rates normalize around 19%-20% in 2032, up from 14.2% in 2022). The company stands to benefit from
many important secular trends: a gradual mix shift toward e-commerce, with consumers increasingly
appreciating the convenience of 24/7 website availability and quick home shipping, a renewed
emphasis on digital payments in Latin America, a surge in participation in the formal banking system,
and ongoing increases in internet penetration in the region, offering platform access to a heretofore
untapped clientele. While brick-and-mortar retail figures to retain value for servicing select categories
and purchase occasions, MercadoLibre's investments in fast-moving consumer goods and grocery store
partnerships betray an interest in becoming customers' one-stop shop for online ordering, imitating
successes at wide-moat Amazon, wide-moat Walmart, and wide-moat Alibaba. Ultimately, we believe
that the firm's attention to quickly adapting the best of global peers' innovations, its robust suite of
auxiliary seller services, and modular improvements to the customer experience via loyalty, search
engine optimization, media streaming, peer-to-peer payments, and financial-technology solutions leave
few incentives for participants to abandon the platform, perpetuating its network effect.
Next, we view the treasure trove of data from marketplace transactions, fulfillment services, and
payments as the driving factor underpinning MercadoLibre's intangible asset moat source, permitting
better sales forecasting, reducing purchase friction, and continually improving average delivery times.
While there are certainly larger global e-commerce companies and strong regional brick-and-mortar
retailers, MercadoLibre maintains a compelling database of Latin American e-commerce transactions
that captures both idiosyncratic behavior by local consumers and differences between online and in-
store shopping behaviors, particularly when considered in tandem with the firm's burgeoning brick-and-
mortar point-of-sale offering (with nearly three fourths of processed payments occurring off-platform).
By our estimates, the firm maintained north of 25% share of the quickly growing Latin American e-
commerce market, outpacing its closest local competitors (Lojas Americanas and Magazine Luiza) by a
factor of 4-5 times across the regional block (according to our estimates, company filings, and
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Euromonitor data), allowing for superior search engine optimization, conversion rates, and advertising
efficacy. The firm's intangible assets underpin a quickly improving marketplace value proposition,
evidenced by strong growth in active users, 750 basis points of marketplace take-rate expansion, and
ongoing market share gains between 2018 and 2022.
On the fulfillment side, MercadoLibre managed shipping for more than 1 billion items (more than 94% of
items sold on its marketplace) in 2022, with proprietary technologies stitching together a complex
network of warehouses and fulfillment centers, cross-docking facilities, third-party service providers,
and national post outfits. As the firm has progressed along the learning curve, we've seen average
delivery times fall to just 1.5 days, against three to four days for the Brazilian postal service, with sub-
48-hour deliveries clocking in just shy of 80% by the end of 2022 (with same- and next-day delivery
consistently in the 50%-55% range). We believe that inefficiencies with the public postal service render
private investments in proprietary fulfillment solutions compelling, with heavy union representation
among national post employees resulting in lethargic investments in labor-saving automation, limited
scalability, and slower service—permitting private players to generate value by alleviating one of two
critical pain points (shipping and payments) in e-commerce and heightening barriers to entry for
potential competitors. Owned logistics also permits redundancies, and routing around isolated worker
strikes or inventory bottlenecks to avoid service outages. With the largest e-commerce players leaning
heavily on proprietary fulfillment apparatuses, there has been little incentive for the development of a
robust network of third-party providers, heightening barriers to entry for new players in the market, with
entrants forced to palate slower shipping speeds through national postal services or otherwise absorb
high up-front investments in warehouses, vehicles, and equipment.
Turning to payments, $122 billion in processed payment volume during 2022, including 100% of
marketplace gross merchandise volume, reduces friction at checkout (keeping consumers on platform),
limits chargebacks and allowances for bad debt, and may allow the firm to better underwrite short-term
credit for micro, small, and medium businesses, or MSMBs, and consumers than traditional regional
banks, particularly when tied to platform GMV or used in tandem with data from incumbent banks
(pending open banking implementation in Latin America). Notably, while we've assigned brand
intangible assets to some e-commerce retailers in the past, our analysis for MercadoLibre failed to yield
any evidence of pricing premiums, though we suspect that, similar to Amazon, the platform has
increasingly earned top mind-share for product search, which could yield benefits through better
advertising conversion rates and higher GMV growth. Organic search traffic was 61% at the end of
2022, slightly behind scaled e-commerce marketplaces in the U.S. (narrow-moat eBay around 80%,
Amazon's 83%, per SimilarWeb data).
Considering our final moat source, we believe MercadoLibre has been able to tackle the most elusive
problem for marketplace operators: creating switching costs around their platforms and avoiding the
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pernicious problem of multihoming. While churn for MSMBs is naturally high (limiting customer lifetime
value and implicit duration of relationships), we view switching costs as most pronounced in this “long-
tail” segment, with turnkey website solutions, inventory management, demand forecasting, on-platform
advertising, and customer relationship management tools representing particularly painful systems to
rip out and replace. This is particularly true for operators that generate material sales on the platform; a
2022 Center for Argentine Commerce study suggested that retailers that maintain a presence on online
marketplaces generate 45% of consolidated sales on that platform, a huge sales base that we believe
they'd be reluctant to surrender.
For larger merchants, we expect MercadoLibre to take a different tack, subsidizing shipping fulfillment
services and warehousing over the near to medium term to ensure standardization, quality, and faster
inventory turnover. As fulfillment penetration increases (from 43% at the end of 2022) to levels seen in
more mature geographies (nearly 70% in Mexico), and as the lion's share of orders are “managed,”
through fulfillment or cross-docking, we believe that the firm will be able to gradually raise prices to the
extent that sellers benefit from faster inventory turns even as their (sellers') operating margins contract.
Ultimately, for standardized products that turn over more quickly, warehousing makes a lot of economic
sense, and increases switching costs for firms in the MercadoLibre ecosystem, with sellers reluctant to
return to slower public shipping alternatives, particularly as customer demand grows increasingly
sensitive to shipping speed and pricing. Lastly, on the seller side of the equation, MSMB credit figures
to keep long-tail sellers on platform, with the firm tying credit availability closely to seller GMV, and
reducing credit losses by withdrawing interest and principal payments directly from seller revenue. With
Brazil, Argentina, and Mexico, which together represented 95% of 2022 revenue, performing poorly on
credit availability for small and midsize businesses (scoring 103rd, 132nd, and 85th out off 141, per the
World Economic Forum's 2019 competitiveness report), we view this as a competitive differentiator,
more closely tying merchants to the platform. While switching costs for consumers are admittedly
weaker, a suite of financial products, including after pay services and revolving credit (with proprietary
scoring based on platform payment behavior), mobile wallets (with QR code payments with select retail
partners, bill payment functionality, and mobile phone top-ups), and asset management generating
inertia. While customer churn is difficult to isolate, an increasingly compelling value proposition, with
free shipping breakpoints lowered to BRL 79 (approximately $15), average delivery times of 1.5 days,
partnerships with music and video streaming providers, an improving search functionality, and
maintained rollout of auxiliary products and updates reduces incentives to multi-home, even for buyers.
Finally, considering the duration of the economic moat, we believe that 20 years for excess returns is
appropriate, with each passing year increasing the barriers to success and entry costs for competitors
built in the MercadoLibre image. A viable competitor would have to offer similar product breadth,
competitive adjacent services (shipping, platform advertisements, payments, turnkey web solutions,
advertising, classifieds), and better pricing to capture any meaningful market share, as we see it, likely
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enduring many years of painful losses.
Fair Value and Profit Drivers Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023
We've raised our fair value estimate to $1,260 per share from $1,250 after digesting second-quarter
results, with time value of money and surprising strength in the Brazil and Mexico segments largely
offset by persistent weakness in the firm's home Argentine market. The firm continues to generate
outsize growth despite a challenging backdrop, growing its gross merchandise volume by 12%, 24%,
and 52% in Argentina, Brazil, and Mexico (in U.S. dollars), respectively, during its second quarter, taking
share in each market and incrementally growing its fulfillment penetration, to 46%. While the firm
narrowly missed our expectations going into the quarter, with $3.42 billion in sales and $5.16 in diluted
EPS falling just shy of our $3.49 billion and $5.55 estimates, respectively (attributable to an unusually
large $182-million foreign-exchange loss in Argentina), we're encouraged by both margin expansion and
strong results in Brazil and Mexico. Moving forward, we expect the Mexican market to become
increasingly important for MercadoLibre, with the firm's investments in its Mexican fintech ecosystem
likely to drive growth in regional digital commerce and help the firm deepen its budding switching costs
with consumers as it strives for financial pre-eminence. We assign the firm a 13% cost of capital, with
our 6% blended country risk premium suggesting a cost of equity of 13.5%.
GMV, take rate, and first-party sales penetration are the key variables driving our valuation on the
commerce side, while payment operations are particularly sensitive to processed payment volume,
credit card spreads, and default rates.
Our forecast calls for expansive GMV growth averaging 19% annually between 2023 and 2032 as
consumers increasingly turn to e-commerce platforms for products they'd previously purchased in-store.
Taken in tandem with our forecast for 12%-13% annual e-commerce growth across the region, we
expect steady market share gains for the online stalwart. MercadoLibre's fulfillment expertise,
proprietary payment offerings, and loyalty program remain attractive draws, while a compelling
(localized) user experience offers an edge over international competition. Further, first-party sales
should drive growth (we forecast approaching midteens penetration in the long term), allowing
MercadoLibre to compete more effectively for wallet share around key holidays with strategic
discounting of fast-moving consumer goods and core consumer electronics products. While first-party
sales carry lower gross and operating margins than the third-party marketplace business, we believe
that they represent an important component of the firm's strategy to become a trusted one-stop shop
for consumers—and should still drive a sizable long-term uptick in operating margin dollars.
On the fintech side, we expect maintained growth in on- and off-platform total payment volume, with
the firm processing roughly $560 billion in transaction volumes by 2032. A growing consumer credit
arm, constrained only by debt ceilings and capital availability accounts for north of 20% of segment
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revenue by 2032. While we expect lending spreads to decline modestly over time, structural
inefficiencies attributable to a large unbanked population and underdeveloped credit scoring agencies
should permit excess risk-adjusted returns through our explicit forecast period.
We anticipate a 2032 gross margin of 45% and an operating margin of 20% as we contemplate volume-
driven leverage in fulfillment and payments, an evolving segment mix, and take rate expansion.
Finally, considering the firm's sensitivity to a devaluation of the Argentine peso, consistent with
unofficial (blue-chip swap) prices, we believe that the impact would be manageable, with lower sales
and sales growth offset by a positive margin impact as a disproportionate share of overhead costs sit in
the region. We believe the maximum financial exposure to a unilateral peso devaluation is roughly
10%—assuming that an equal portion of general and administrative expenses sat in the country—and
could even drive a modest increase in our $1,260 fair value estimate to the extent that cost of capital
impacts were incorporated.
Risk and Uncertainty Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023
As we evaluate MercadoLibre's quickly evolving product suite, end markets, and sensitivity to
macroeconomic health, we believe the firm warrants a Very High Uncertainty Rating. This view is
corroborated by quantitative uncertainty tools and reflects heavy indexation to revenue streams with
inherently cyclical demand (like consumer credit) and to emerging-market economies whose fiscal
health remains acutely sensitive to global interest rates and capital flows.
On the commerce side, MercadoLibre remains sensitive to consumer health across a product suite that
skews toward apparel, home decor, and other discretionary products. High category growth and a mix
shift from physical stores has driven elevated incidence of online couponing, seller rebates, and
shipping incentives, all of which affect profitability. While the firm remains well positioned to win in the
space, success is far from a foregone conclusion, given the relatively early stage of market development
and presence of large, well-capitalized competitors.
Further, Latin America banks have tended to generate much higher returns on equity than counterparts
in the United States and Europe, attributable in part to concentration, high fees for basic services, and a
large population of unbanked citizens (impeding effective credit scoring and leading to higher discount
rates). These returns have attracted substantial competitive pressure, with a slew of financial
technology companies jockeying for market share in lending, payment processing, insurance
underwriting, and brokerage services.
Finally, we identify human capital management as the most material environmental, social, and
governance risk facing the firm, with recruitment of talented developers (particularly considering Latin
American educational infrastructure and lower regional per capita income) adding a degree of
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uncertainty, potentially affecting the firm's ability to consistently provide a superior user experience
across its expanding product suite.
Capital Allocation Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023

We assign MercadoLibre an Exemplary Capital Allocation Rating, as we consider the firm's balance
sheet heath, investment opportunities, and shareholder distribution policy. In our view, MercadoLibre
scores well on all three pillars of our framework.
Considering the firm's financial health, low revenue cyclicality in the core marketplace and payments
businesses, medium operating leverage, and a moderate debt burden (2 times gross debt/EBITDA
through 2027) underpin our assessment. While the firm is subject to an implicit credit rating ceiling,
attributable to deriving roughly 75%-80% of revenue from non-investment-grade Brazil and Argentina, it
doesn't appear beholden to commensurately higher issuance costs, evidenced by the its sub-3.2%
coupon rates on its 2026 and 2031 convertible notes. While we anticipate cumulative capital
expenditures of $1.9 billion through 2025, we believe that $6.7 billion in unrestricted cash, equivalents,
and investments at the end of the first quarter of 2023 and modest securitization in the credit business
should be more than enough to fund expected lending and fixed investment needs.
On the investment side, we've been impressed by management's hefty investments in fulfillment
infrastructure, permitting the firm to compete more effectively in business-to-consumer channels.
MercadoLibre slashed its dividend in 2018 as it built out its Envios platform, broadened its financial-
services ecosystem, and retooled the platform experience—generating three successive years of net
losses—but in our view, it succeeded where other customer-to-customer marketplaces have failed: in
proactively pivoting toward B2C sales, consolidating market share, and building a defensible, analog
moat around its ecosystem. In the long run, we're encouraged by the firm's attention to allow
incremental sales to drop to the bottom line only strategically, conditioning investors to value growth
while deferring profitability, a strategy that has materially benefited wide-moat Amazon in the U.S. As a
result, we expect MercadoLibre to remove costs only with careful deliberation and would welcome
further investment at our current estimates of return on new invested capital, with persistently strong
ROICs suggesting that incremental investments should continue to prove moat accretive.
We're particularly impressed by management's willingness to funnel capital toward operations that
generate the highest return on incremental investment, while avoiding value-dilutive investments that
might generate outsize growth at the expense of business health or profitability. A perfect example of
this would be the firm's decision to slow new loan issuance in the third quarter of 2022 as Brazilian
interest rates began to climb and as borrower creditworthiness declined in the older portion of the
credit book. Similarly, management has slowed investment in the budding first-party sales business
(predominantly consumer electronics) until the firm is able to generate more competitive unit economics
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as it works through lingering issues in the segment.
Further, we appreciate management's agility in responding to quickly evolving competition, strategically

accelerating investments in response to market demands. Mercado Puntos, the firm's tiered rewards
offering, is a marquee example of this, with MercadoLibre pulling forward investments in the program
as quarantined consumers flooded online in 2020 and 2021. That program lays the groundwork for an
Amazon Prime-esque paid membership, which would help offset the firm's shipping cost and reduce
pressure to monetize sellers as it seeks to increase fulfillment penetration and service quality. Other
examples abound, including a pivot toward building out first-party inventory and grocery partnerships
last year, and a quick ramp of fulfillment capacity in Andean markets as competitive dynamics
auspiciously shifted. Moving forward, we expect the firm's new advertising platform, additional drop-off
hubs closer to sellers (accelerating flex, or one-day fulfillment offerings), added redundancies among
third-party providers in the Envios network, and brand-building behind the Mercado Pago product suite
to represent the bulk of investment outlay.
On the distribution front, we don't expect MercadoLibre to layer capital returns into the model until 2026
at the earliest, which we view as appropriate in light of the available investment opportunity frontier
and heady returns on incremental investments. Given an extremely scalable third-party marketplace and
payment processing model, we anticipate low-double-digit free cash flow generation (as a percentage
of sales) in the long term, suggesting attractive long-term capital returns potential for shareholders.
Analyst Notes Archive
MercadoLibre: CFO Pedro Arnt Steps Away in Surprise Move but Leaves Company in Excellent
Shape Sean Dunlop, CFA, Equity Analyst, 10 Aug 2023
In big news for the largest online commerce marketplace in Latin America, Pedro Arnt, the CFO and the
most visible figure on the senior leadership team at MercadoLibre, is stepping down to pursue other
opportunities. He will be replaced by Martin de los Santos, the head of the Mercado Credito segment.
Arnt spent 24 years with wide-moat MercadoLibre, overseeing key periods as the firm grew from a
predominately peer-to-peer marketplace into a model analogous to that of wide-moat Amazon in the
United States, with a sprawling fulfillment network, large base of professional merchants, and nearly
$35 billion in 2022 gross merchandise volume. We expect to maintain our Exemplary capital allocation
rating during the transition period, and we expect to closely monitor how the firm's strategy evolves
under new leadership.
MercadoLibre's sprawling fintech business has become an increasingly important profit center for the
firm, generating 43% of consolidated revenues during the firm's most recent quarter, often at better
margins than the core commerce segment. The nascent credit business has been a large contributor to
strong segment results, incubating for the past seven years under de los Santos' leadership and
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representing 17% of consolidated revenues in the second quarter. Perhaps more importantly, the firm
has been able to grow that business profitably, with 37% net interest margins after losses during the
most-recent quarter (a figure that we do expect to compress as the firm moves into lower-yield auto and
housing lending and as credit access improves across the region). It isn't implausible that the Mercado
Pago half of the business is re-emphasized under new management, particularly with the firm's recent
investments in its fintech operations in Mexico.
Ultimately, the firm's road map looks cogent; its sprawling suite of services is designed to secure
financial preeminence with regional customers and introduce Latin American consumers to digital
banking and commerce.
MercadoLibre Earnings: Solid Quarter As Argentina Pressure Offset by Strength in Brazil and Mexico
Sean Dunlop, CFA, Equity Analyst, 3 Aug 2023
The bar must be set pretty high when 31% sales growth and 960 basis points of operating margin
expansion constitute "meeting" expectations, but that's largely the world we live in for Latin America's
largest e-commerce operator. Wide-moat MercadoLibre continues to generate outsize growth despite a
challenging backdrop, growing its gross merchandise volume by 12%, 24%, and 52% in Argentina,
Brazil, and Mexico (in U.S. dollars), respectively, during its second quarter, taking share in each market
and incrementally growing its fulfillment penetration, to 46%. While the firm narrowly missed our
expectations going into the quarter, with $3.42 billion in sales and $5.16 in diluted EPS falling just shy of
our $3.49 billion and $5.55 estimates, respectively (attributable to an unusually large $182-million
foreign-exchange loss in Argentina), we're encouraged by both margin expansion and strong results in
Brazil and Mexico. On balance, a slight miss on quarterly sales and earnings is offset by time value, and
we expect to make few changes to our $1,250 intrinsic valuation.
While the Argentine business remains pressured, Mexico and Brazil generated meaningfully positive
momentum, together comprising 64% of MercadoLibre's contribution profit (up 6 points annually).
Results are particularly encouraging given the firm's (proportionately) less entrenched competitive
position in those markets, and an emphasis on the Mexican fintech business should further ossify gains.
We continue to pencil in outsize cumulative annual growth in sales (26.5%) and operating profit (40%)
over the next five years for the marketplace operator, reflective of the firm's deeply entrenched position
with regional merchants and consumers. Its 109 million quarterly active users across online properties
represent a striking 18% of the Latin American population, by our calculations and World Population
Review data, highlighting its commanding position in the Latin American digital commerce ecosystem.
MercadoLibre Earnings: Strong, Profitable Quarterly Growth Suggests That the Best Is yet To Come
Sean Dunlop, CFA, Equity Analyst, 4 May 2023
Wide-moat MercadoLibre's robust comps are becoming its own toughest competition; the Latin
ß
American e-commerce stalwart posted 43% foreign exchange-neutral growth in gross merchandise
volume, 96% foreign exchange-neutral growth in total payment volume, and a healthy 11.2% operating
margin during a fantastic first quarter. While the firm continues to fire on all cylinders, results clocked in
pretty much in line with our expectations, as both $9.4 billion in GMV and $37 billion in TPV aligned with
our own estimates. EPS of $3.97 arrived just shy of our $4.01 forecast, but we remain extremely
impressed with management's ability to efficiently deploy capital across a sprawling suite of business
segment and country combinations. As we digest results, we plan to raise our $1,200 fair value estimate
by a low-single-digit percentage, consistent with time value. Shares look fairly priced.
With a track record of moat-accretive investments, we harbor no qualms with management's decision to
increase engineering headcount by 12% in the year to come as it builds out its advertising platform (ads
comprised 1.4% of quarterly GMV, up 30 basis points annually) and auxiliary financial products, seeking
"financial pre-eminence" with its 100 million quarterly active users (representing a striking 14.9% of the
total population of Latin America). On the other side of the coin, we applaud leadership's prudence in
pursuing a measured rollout of its loss-making first-party business (up 8% annually) and limiting growth
in its credit book to lower-risk cohorts against a challenging macroenvironment.
Considering the suite of near-term regional risks, we expect more measured growth in 2023 and 2024,
driven by slower growth in items per buyer (e-commerce skews heavily toward discretionary purchases,
by and large) before a more pronounced uptick in 2025. As we consider the firm's mix of businesses and
profitable ads platform, we continue to view 20% long-term operating margins as achievable.
MercadoLibre Balances Strong Growth and Profitability Despite Macro Headwinds; Shares Fairly
Priced Sean Dunlop, CFA, Equity Analyst, 24 Feb 2023
Wide-moat MercadoLibre posted a strong fourth quarter, achieving its first full year with $10 billion in
net revenue, $1 billion in EBIT, and $100 billion in processed payments. It has deftly navigated
investments in myriad concurrent initiatives, including a growing financial services ecosystem, an ad
platform that has swelled to 1.4% of gross platform sales (five times larger than prepandemic), and a
$2.8-billion lending business with enviable economics. Most importantly, the firm has done so
profitably, with 11.6% quarterly operating margin representing the highest quarterly print since the firm
pivoted from a consumer-to-consumer to a principally business-to-consumer model in 2017-18. We
expect to raise our $1,140 fair value estimate by a low-single-digit percentage, with the quarter
unearthing nothing that shakes our long-term expectations.
More concretely, quarterly net revenue of $3 billion fell short of our $3.2 billion forecast as
MercadoLibre pulled back on less profitable first-party sales. Nevertheless, the firm's $3.25 in quarterly
diluted EPS healthily exceeded our $2.05 estimate, with a higher mix of more-profitable third-party
revenue and a pullback in marketing expenditure driving the bulk of outperformance. We still expect
modest annual expansion in operating profit and operating margin over the next decade, consistent
ß
with management guidance, and view roughly 20% long-term operating margins as plausible, which
contemplates midteens first-party sales penetration (against roughly 3% today).
Finally, the firm's 35% growth in consolidated foreign exchange-neutral gross merchandise volume, or
GMV, drove market share gains across all key geographies. We view ongoing market share capture as
exceedingly likely moving forward, with preference for integrated fulfillment and competitive pricing
driving online commerce toward a winner-take-most equilibrium; we think MercadoLibre's mid-20%
share cements it as the most likely long-term winner in the region.
Mercadolibre Posts Impressive Profitability, Sales Resilience Despite Macro Pressure; Shares Cheap
Sean Dunlop, CFA, Equity Analyst, 4 Nov 2022
Wide-moat Mercadolibre posted robust quarterly earnings, with strong growth across its commerce
(22.5%), financial technology (63.5%), and credit (152%) segments, despite surging regional interest
rates and declining consumer sentiment. It was encouraging to see strong growth in active users
(11.8%) across platforms, attesting to the compelling value proposition the firm has spun around its
commerce, digital wallet, and credit business lines, while the expansion of the nascent ads
business—up 40 basis points to 1.3% of gross merchandise volume—helped drive record quarterly
operating profitability. This last point is perhaps the most important, with management's decision to
funnel capital toward longer-term and profitable growth, continuing to yield steady operating leverage,
with 11% operating margin marking the highest quarterly print since the second quarter of 2019, by our
estimates. On the other side of the coin, the willingness to eschew value-dilutive projects continues to
impress, and supports our Exemplary capital allocation rating for the name—in this case, attested to by
management's willingness to slow growth in the Brazilian credit business as lending conditions
softened, and to pull back on the unprofitable first-party business. While earnings were impressive, only
the acceleration of profitability truly bucked our expectations, underpinning our expectation for a low-
single-digit increase to our $1,100 fair value estimate.
We continue to see value at current market prices, which trade at about a 20% discount to our fair value
estimate despite a mid-single-digit increase in aftermarket trading. Our forecasts already contemplate a
sharp slowdown in the lending and commerce businesses in 2023, given hawkish monetary policy and
stubborn inflation, and we continue to see meaningful long-term leverage from the ads business (which
runs at 70%-80% operating margins) and scaling credit book, with 20% operating margins looking
attainable in the long term.
Looking for Holiday Savings? Wide-Moat MercadoLibre Shares Are 25% Off Sean Dunlop, CFA,
Equity Analyst, 28 Oct 2022
Wide-moat MercadoLibre trades at a 25% discount to our intrinsic valuation, with the Latin American
marketplace behemoth's competitive position looking deeply entrenched and wildly underappreciated.
ß
While we are shaving our fair value estimate for the name to $1,100 per share, from $1,400, on the back
of our expectation for a macroinduced downturn and lower payment processing take rates, we remain
ready buyers, and continue to view shares as attractive for long-term investors.
In our view, risks from competitive encroachment—principally by social commerce marketplaces—are

overstated, with those competitors’ soft unit economics and high adjusted EBITDA margin losses per
order suggesting that pressure is likely to abate. We continue to view MercadoLibre as a long-term
market share gainer, consistent with more developed e-commerce markets around the globe, with our
forecasts anticipating that the firm achieves regional penetration in the mid-40s, consistent with figures
seen at wide-moat Amazon and Alibaba, which feature comparable business models. Held in
conjunction with our expectations for regional e-commerce sales to grow at a 14.5% CAGR through
2031, we expect approximately 20% annual growth for MercadoLibre's platform sales, driven by a surge
in banking participation, internet penetration, and digital payment volume across the region, all of
which strike us as persistent and structural drivers.
Our report considers geopolitical and macroeconomic risk in the region, and we note that bridging the
gap between the official Argentine Peso rate and the market rate could potentially be a tailwind, rather
than a headwind, for the operator. Finally, we help frame our valuation with sum-of-the-parts ($1,020)
and justified multiples ($1,330) approaches, solidifying our confidence in our own $1,100 estimate. K
ß
Competitors Price vs. Fair Value
Amazon.com Inc AMZN
Fair Value: 150.00

4 Aug 2023 02:13, UTC
200
Last Close: 140.57
150 Over Valued
Under Valued
100
50
0
Analytics
2018 2019 2020 2021 2022 YTD
0.68 0.80 0.90 0.81 0.56 0.94 Price/Fair Value
28.43 23.03 76.26 2.38 -49.62 67.35 Total Return %
Morningstar Rating
Total Return % as of 14 Aug 2023. Last Close as of 14 Aug 2023. Fair Value as of 4 Aug 2023 02:13, UTC.
PayPal Holdings Inc PYPL
Fair Value: 135.00

1 Jul 2022 02:04, UTC
400
Last Close: 63.27
300 Over Valued
Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD Analytics
1.20 1.15 1.89 1.25 0.53 0.47 Price/Fair Value

14.22 28.64 116.51 -19.48 -62.23 -11.16 Total Return %
Morningstar Rating
Total Return % as of 14 Aug 2023. Last Close as of 14 Aug 2023. Fair Value as of 1 Jul 2022 02:04, UTC.
ß
Alibaba Group Holding Ltd Ordinary Shares 09988
Fair Value: 124.00

20 Jul 2023 12:41, UTC
400
Last Close: 92.80
300 Over Valued
Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD Analytics
— 0.85 0.81 0.65 0.50 0.75 Price/Fair Value

— — 12.07 -48.79 -27.46 7.59 Total Return %
Morningstar Rating
Total Return % as of 14 Aug 2023. Last Close as of 14 Aug 2023. Fair Value as of 20 Jul 2023 12:41, UTC.
ß
Morningstar Historical Summary

Financials as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Bil) 0.47 0.56 0.65 0.84 1.22 1.44 2.30 3.97 7.07 10.54 6.45 12.14
Revenue Growth % 26.5 17.8 17.1 29.5 44.1 18.3 59.5 73.1 77.9 49.1 33.2 37.5
EBITDA (USD Mil) 177 150 194 240 121 37 32 293 674 1,504 1,232 2,149
EBITDA Margin % 37.5 27.0 29.8 28.4 10.0 2.5 1.4 7.4 9.5 14.3 19.1 17.7
Operating Income (USD Mil) 154 170 155 195 145 -69 -153 128 441 1,034 898 1,543
Operating Margin % 32.5 30.5 23.8 23.1 11.9 -4.8 -6.7 3.2 6.2 9.8 13.9 12.7
Net Income (USD Mil) 117.51 72.58 105.79 136.37 13.78 -36.59 -172.00 -1.00 83.00 482.00 463.00 757.00
Net Margin % 24.9 13.0 16.2 16.2 1.1 -2.5 -7.9 -0.1 1.2 4.6 7.2 6.2
Diluted Shares Outstanding (Mil) 44 44 44 44 44 45 49 50 50 51 51 52
Diluted Earnings Per Share (USD) 2.66 1.63 2.40 3.09 0.31 -0.82 -3.71 -0.08 1.67 9.53 9.12 14.92
Dividends Per Share (USD) 0.57 0.66 0.41 0.60 0.60 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Valuation as of 31 Jul 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 10.8 10.6 8.0 9.0 11.4 8.4 13.3 25.1 10.7 4.5 5.4 5.6
Price/Earnings 44.6 70.9 50.3 55.2 104.2 -126.6 -217.4 -10,000.0 833.3 158.7
Years 97.1 101.0
Years
Price/Cash Flow 26.6 35.7 29.8 26.7 48.8 58.1 66.7 82.6 128.2 Years
20.6 15.2 15.8
Dividend Yield % 0.53 0.52 0.36 0.38 0.19 0.05 — — — — — —
Price/Book 14.7 16.5 13.9 17.5 34.2 38.8 13.9 47.8 555.6 Years
26.1 29.1 30.4
EV/EBITDA 25.8 36.2 25.8 28.0 112.3 347.0 821.6 278.9 103.6 Years
29.6 0.0 0.0
Operating Performance / Profitability as of 30 Jun 2023 Years Years Years Years Years Years Years Years
Years Years Years
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 21.9 9.3 10.7 11.5 0.9 -1.9 -5.1 -0.1 1.0 4.0 3.2 5.7
ROE % 37.1 20.8 30.4 35.5 3.7 -11.0 -15.6 -0.2 5.2 28.7 22.7 39.5
ROIC % 34.4 14.1 16.6 18.7 0.1 -3.1 -10.4 0.0 3.2 8.1 4.9 9.9
Asset Turnover 0.9 0.7 0.7 0.7 0.8 0.7 0.7 0.7 0.9 0.9 0.4 0.9
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 0.7 44.2 46.4 41.3 48.9 64.1 28.0 40.1 63.0 63.2 57.7 —
Equity/Assets % 58.0 36.8 33.8 31.4 19.5 15.0 41.5 25.3 15.2 13.3 14.8 —
Total Debt/EBITDA 0.1 1.9 1.5 1.3 3.0 20.1 33.4 5.8 5.9 3.6 4.5 —
EBITDA/Interest Expense 75.3 12.9 9.5 9.4 4.6 0.6 0.5 2.7 2.9 4.7 6.6 5.7
Morningstar Analyst Historical/Forecast Summary as of 14 Aug 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 12-31-2022 2021 2022 2023 2024 2025
Price/Sales 9.6 4.0 4.9 4.0 3.1
Revenue (USD Mil) 7,069 10,537 13,320 16,134 21,216 Price/Earnings 333.8 63.0 43.0 45.9 32.7
Revenue Growth % 77.9 49.1 26.4 21.1 31.5 Price/Cash Flow 173.4 17.1 206.7 119.1 31.8
EBITDA (USD Mil) 849 1,840 2,790 3,010 4,294 Dividend Yield % — — — — —
EBITDA Margin % 12.0 17.5 21.0 18.7 20.2 Price/Book 43.9 23.4 24.1 15.8 10.7
EV/EBITDA 82.3 24.2 24.1 22.3 15.6
Operating Income (USD Mil) 441 1,034 1,767 2,204 3,074
Operating Margin % 6.2 9.8 13.3 13.7 14.5
Net Income (USD Mil) 201 680 1,525 1,428 2,003
Net Margin % 2.9 6.5 11.5 8.9 9.4
Diluted Shares Outstanding (Mil) 50 51 51 51 51
Diluted Earnings Per Share(USD) 4.04 13.44 30.16 28.24 39.61
Dividends Per Share(USD) 0.00 0.00 0.00 0.00 0.00
ß
ESG Risk Rating Breakdown
Values
Exposure Subject Subindustry (38.0) u Exposure represents a company’s vulnerability to ESG
Company Exposure 1
39.9 risks driven by their business model
39.9
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 37.1 Medium
2 0 55+ specified at the company level
Unmanageable Risk 2.8 u Scoring ranges from 0-55+ with categories of low, me-
Low Medium High
dium, and high-risk exposure
Management Values u Management measures a company ’s ability to manage

Manageable Risk 37.1 ESG risks through its commitments and actions
45.7%
– Managed Risk3 16.9 Average
u Management assesses a company's efficiency on ESG
Management Gap4 20.2 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 23.0 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

22.96
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Jul 05, 2023. Highest Controversy Level is as of Aug 08,
2023. Sustainalytics Subindustry: Internet Software and Services.
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Sustainalytics provides Morningstar with company ESG ratings and metrics
risks, by evaluating the company’s ability to manage the ESG risks it faces. on a monthly basis and as such, the ratings in Morningstar may not
necessarily reflect current Sustainalytics’ scores for the company. For the
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by most up to date rating and more information, please visit: sustainalytics.com/
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 45.7% 4. Management Gap assesses risks that are not esg-ratings/.
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 05 Jul 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
MercadoLibre Inc 39.9 | Medium 0 55+ 45.7 | Average 100 0 23.0 | Medium 0 40+
Amazon.com Inc 41.7 | Medium 0 55+ 29.0 | Average 100 0 30.5 | High 0 40+
Alibaba Group Holding Ltd 37.4 | Medium 0 55+ 31.1 | Average 100 0 26.5 | Medium 0 40+
PayPal Holdings Inc 34.7 | Low 0 55+ 57.5 | Strong 100 0 16.4 | Low 0 40+
— —|— 0 55+ —|— 100 0 —|— 0 40+
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Appendix
Historical Morningstar Rating
MercadoLibre Inc MELI 14 Aug 2023 22:57, UTC
December November October September August July May May April March February January
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
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Amazon.com Inc AMZN 14 Aug 2023 21:16, UTC

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PayPal Holdings Inc PYPL 14 Aug 2023 21:16, UTC

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Alibaba Group Holding Ltd Ordinary Shares 09988 14 Aug 2023 16:28, UTC
- - - - QQQQ QQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQ
QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQ QQQQQ QQQQQ QQQQ QQQQ QQQQ
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QQQQ - - - - - - - - - - -
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Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company ’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company ’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
ß
thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm ’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
ß
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
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tion of Sustainalytics ESG Risk Categories on a 1 to 5 of the presentation and/or disclosure standards applic-
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
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sidered execution, compensation, related party transac- the Equity Research Group and their officers, directors
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Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to or related to, the information, data, analyses or opinions
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected within the report. The Equity Research Group encourages
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to recipients recipients of this report to read all relevant is-
lar emphasis on the firm’s balance sheet, investments, buy or sell a security. sue documents (e.g., prospectus) pertaining to the secur-
and shareholder distributions. Analysts consider compan- ity concerned, including without limitation, information
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management, and dividend and share buyback policies. Please note that investments in securities are subject to fore making an in vestment decision and when deemed
Corporate governance factors are only considered if they market and other risks and there is no assurance or guar- necessary, to seek the advice of a legal, tax, and/or ac-
are likely to materially impact shareholder value, though antee that the intended investment objectives will be counting professional.
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tributions. Analysts assign one of three ratings: "Exem- be sustained in future and is no indication of future per- The Report and its contents are not directed to, or inten-
plary", "Standard", or "Poor". Analysts judge Capital Alloc- formance. A security investment return and an investor ’s ded for distribution to or use by, any person or entity who
ation from an equity holder’s perspective. Ratings are de- principal value will fluctuate so that, when redeemed, an is a citizen or resident of or located in any locality, state,
termined on a forward looking and absolute basis. The investor ’s shares may be worth more or less than their country or other jurisdiction where such distribution, pub-
Standard rating is most common as most managers will original cost. A security’s current investment performance lication, availability or use would be contrary to law or
exhibit neither exceptionally strong nor poor capital alloc- may be lower or higher than the investment performance regulation or which would subject Morningstar, Inc. or its
ation. noted within the report. Morningstar’s Uncertainty Rating affiliates to any registration or licensing requirements in
serves as a useful data point with respect to sensitivity such jurisdiction.
Capital Allocation (or Stewardship) analysis published pri- analysis of the assumptions used in our determining a fair
or to Dec. 9, 2020, was determined using a different pro- value price. Where this report is made available in a language other
cess. Beyond investment strategy, financial leverage, and than English and in the case of inconsistencies between
dividend and share buyback policies, analysts also con- the English and translated versions of the report, the Eng-
sidered execution, compensation, related party transac- General Disclosure lish version will control and supersede any ambiguities
tions, and accounting practices in the rating. associated with any part or section of a report that has
Unless otherwise provided in a separate agreement, re-
cipients accessing this report may only use it in the coun- been issued in a foreign language. Neither the analyst,
Sustainalytics ESG Risk Rating Assessment:The ESG Morningstar, Inc., or the Equity Research Group guaran-
try in which the Morningstar distributor is based. Unless
Risk Rating Assessment is provided by Sustainalytics; a tees the accuracy of the translations.
stated otherwise, the original distributor of the report is
Morningstar company.
Morningstar Research Services LLC, a U.S.A. domiciled
financial institution. This report may be distributed in certain localities, coun-
Sustainalytics’ ESG Risk Ratings measure the degree to tries and/or jurisdictions (“Territories ”) by independent
which company’s economic value at risk is driven by en- third parties or independent intermediaries and/or distrib-
This report is for informational purposes only and has no
vironment, social and governance (ESG) factors. utors (“Distributors”). Such Distributors are not acting as
regard to the specific investment objectives, financial
situation or particular needs of any specific recipient. This agents or representatives of the analyst, Morningstar,
Sustainalytics analyzes over 1,300 data points to assess a Inc. or the Equity Research Group. In Territories where a
publication is intended to provide information to assist in-
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stitutional investors in making their own investment de-
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cisions, not to provide investment advice to any specific
managed ESG Risks represented as a quantitative score. laws, rules, circulars, codes and guidelines established by
investor. Therefore, investments discussed and recom-
Unmanaged Risk is measured on an open-ended scale
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Morningstar Equity Analyst Report | Report as of 14 Aug 2023 23:04, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 24

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

Price vs. Fair Value

Last Close: 1,296.52

1500 Over Valued

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

partnerships, and first-party sales, particularly as a cohort of customers maintain COVID-19-driven

Bears Say Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023

Economic Moat Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

Fair Value Fair Value Fair Value

Economic Moat Wide Wide Narrow Wide

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

enduring many years of painful losses.

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

Capital Allocation Sean Dunlop, CFA, Equity Analyst, 14 Aug 2023

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

as it works through lingering issues in the segment.

Further, we appreciate management's agility in responding to quickly evolving competition, strategically

Analyst Notes Archive

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

In our view, risks from competitive encroachment—principally by social commerce marketplaces—are

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

Competitors Price vs. Fair Value

Amazon.com Inc AMZN

Fair Value: 150.00

PayPal Holdings Inc PYPL

Fair Value: 135.00

1.20 1.15 1.89 1.25 0.53 0.47 Price/Fair Value

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

Alibaba Group Holding Ltd Ordinary Shares 09988

Fair Value: 124.00

— 0.85 0.81 0.65 0.50 0.75 Price/Fair Value

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

Morningstar Historical Summary

Valuation as of 31 Jul 2023

Morningstar Analyst Historical/Forecast Summary as of 14 Aug 2023

MercadoLibre Inc MELI QQQ 14 Aug 2023 22:57, UTC

ESG Risk Rating Breakdown

Management Values u Management measures a company ’s ability to manage

Management Gap4 20.2 100 0 programs, practices, and policies

Overall Unmanaged Risk 23.0 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

— —|— 0 55+ —|— 100 0 —|— 0 40+

Amazon.com Inc AMZN 14 Aug 2023 21:16, UTC

PayPal Holdings Inc PYPL 14 Aug 2023 21:16, UTC

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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