eBay's Shadow Clouds MercadoLibre's Future
Kevin Kelleher
08/13/07 - 12:48 PM EDT
It takes nerve these days to venture out into the volatile public
markets with a stock offering.
Already two companies on the slate for an
IPO last week -- alt-energy company
NanoDynamics and fingerprinting-device maker
Cross Match Technology -- have formally postponed their
plans for an offering.
One that did push forward is
MercadoLibre, an
Argentina-based online-commerce company in which
eBay owns a 19.7% stake.
MercadoLibre priced its shares Friday at $18 and has nearly doubled to $34.75 in recent trading.
Since launching its initial operations in Argentina in 1999, MercadoLibre has expanded into 12 countries throughout Latin America, including large economies such as Mexico and Brazil and, most recently, Costa Rica, Dominican Republic and Panama.
MercadoLibre's market is still somewhat small. Its gross merchandise value (the total value of goods and services bought and sold through its sites) was $1.1 billion last year, and $313 million in the first quarter of 2007. By contrast, eBay's GMV last year was $25 billion in the U.S. alone.
But that leaves lots of room to grow. Latin America's combined gross domestic product is $3 trillion (about 6% of the world's) vs. $13 trillion for the U.S. The number of Internet users in Latin America has been growing 31% a year this decade, compared with the 13% annual growth in North America, according to InternetWorldStats.com.
That explains why MercadoLibre's revenue and profit have been
growing at a much faster rate than eBay's. Revenue grew 85% last year to
$52.1 million. In the first quarter, it grew 50% to $16.5 million.
Operating income, meanwhile, grew more than threefold in the first quarter to $2.8
million from $800,000 in the year-ago quarter.
To the degree that eBay has been active in Latin America, it's been
through MercadoLibre. In 2001, eBay bought Paris-based iBazar to bulk up
its European presence, and it took control of iBazar's Brazilian unit as
well -- until eBay sold the Brazilian operations to MercadoLibre in
exchange for the equity stake. As a result of the offering, in which
eBay isn't selling any of its shares, that stake will be diluted to
18.5%.
eBay has been much more than a passive stockholder, lending the
company $12 million in 2005 -- $9.3 million that MercatoLibre is raising
will repay the outstanding balance -- and, as the IPO prospectus notes,
"access to certain know-how and experience, which accelerated aspects of
our development."
What's more, eBay's agreement to not compete with
MercadoLibre for a number of years expired last
September. "Even though eBay is one of our stockholders, with the
termination of this agreement, there are no contractual restrictions
upon eBay becoming one of our competitors," the IPO filing notes.
If that happened, the company says in the risk section of the
filing, "it would have a material adverse effect on our results of
operations and prospects." This is more than your typical risk-factor
boilerplate -- such a move is a part of eBay's playbook: Despite its 25% stake in Craigslist, eBay recently began competing with the online classifieds site through the launch of its Kijiji.com service in the U.S. market.
Another small but still troubling red flag is in the offering itself: MercadoLibre planned to raise $44.8 million from the offering before
expenses, compared with the $231.5 million that will be raised by
current stockholders selling their shares. That 5-to-1 ratio is normally
reversed in IPOs.
It makes you wonder: Why the rush? If the company's prospects are so
good, why not wait until the lockup expires and the company can sell shares in
the market at a profit? A prudent investor can only hope this isn't an
attempt to cash out before eBay muscles into its market.
A bigger red flag is waving above the valuation of the deal. If you conservatively take into account the stock at its $18-a-share pricing, its market cap would be $797 million. That's more than 15 times revenue last
year. If 2007 revenue continues to grow at the same rate it did in the
first quarter, that's still a future price-to-sales ratio above 10.
On an EPS basis, the historical valuation is even more absurd.
MercadoLibre posted a profit of $1.1 million last year. So the IPO
is valuing the company at 725 times its earnings. The company would need
to grow its profit to $8 million this year in order to get its P/E ratio
below 100.
MercadoLibre is a promising company with impressive revenue and
profit growth. It's a leading player in a growing market, and its close
ties to eBay strengthen its position all the more.
But there are warning signs that would-be investors should study
closely if they want to invest in this stock: the looming threat of eBay
as a competitor; the seeming lack of confidence exhibited by the selling
shareholders; and, most ominously, the surreal valuation.
