Tech Resurgence in Latin America
Nubank and MercadoLibre, two tech companies in Latin America, are thriving and defying expectations. They are profitable and experiencing significant growth in the region.
When you think of Latin America, world-beating technology companies might not be the first thing that comes to mind. However, two marquee regional names have defied expectations and bounced back from the tech wreck of 2021-22. While their Asian peers continue to struggle, Nu Holdings (ticker: NU), the parent company of Brazil-based financial-technology firm Nubank, has seen its shares nearly double this year. Similarly, MercadoLibre (MELI), the e-commerce titan that primarily operates in Brazil, has experienced a 40% increase in its stock value.
Notably, these companies aren't just seeing their shares rise, but they are also profitable. Nubank is expected to achieve its first full-year profit in 2023, according to Malcolm Dorson, the head of emerging markets strategy at GlobalX exchange-traded funds. Additionally, MercadoLibre, which has been in the black since 2021, saw its second-quarter profit more than double year on year, reaching $262 million.
One of the factors contributing to this success is the favorable environment in Brazil. The country has witnessed a significant increase in internet users, with 50 million new users joining since 2019. Furthermore, around 30% of the population previously had no access to traditional banking services. The central bank's decision to cut the high 13.75% interest rate has also fueled expectations of increased consumer spending.
In addition to the favorable market conditions, the management teams at Nubank and MercadoLibre have played a crucial role in their success. Nubank started by targeting the unbanked population with credit limits as low as $50. Over time, they gradually expanded these limits as customers built credit histories. This approach has kept default rates low and allowed Nubank to achieve a net interest margin of 19%, as reported by Autonomous Research. As Malcolm Dorson explains, "They've got their return on equity up to 30% to 35%. People are starting to drink the Kool-Aid."
On the other hand, MercadoLibre has found success by leveraging its e-commerce presence to facilitate financial transactions. Already, almost half of its revenue comes from operations such as payment processing and interest on installment payments. The company is now venturing into Nubank's credit-card turf, signaling its determination to expand further.
Latin America is proving that it has the potential to be a thriving hub for technology companies. As the region continues to embrace digitalization, companies like Nubank and MercadoLibre are at the forefront, showcasing their ability to adapt and succeed.
The tech scene in Latin America is flourishing, with two companies leading the way - MercadoLibre and Nubank. MercadoLibre, often referred to as the "Amazon of Latin America," has experienced significant growth, surpassing its Brazilian competitor, Americanas. This was largely due to Americanas facing a major accounting scandal. According to Fong, MercadoLibre is firing on all cylinders, with its gross merchandise value increasing by a quarter since last year.
While MercadoLibre dominates the market in Brazil and other Latin American countries, Mexico presents the next big opportunity. Despite being the second-largest economy in Latin America, a quarter of Mexico's population of 128 million is still offline, and 70% are unbanked. However, Nubank, a Brazilian neobank, is struggling to capitalize on this potential, as underwriting credit for underbanked Mexicans proves to be more challenging than anticipated, according to Autonomous analyst Geoffrey Elliott.
Nubank is also facing challenges at home as more affluent customers turn to established banks. Additionally, the Brazilian government is considering capping credit card interest rates that currently exceed 100% annually. This has led to skepticism about Nubank's market valuation, which is nearly seven times its book value. In comparison, top old-school competitor Itaú Unibanco Holding has a market-to-book ratio of only 1.4. Elliott questions whether there is enough capacity for further growth in Nubank's products within the Brazilian consumer market.
On the other hand, MercadoLibre is expanding rapidly in Mexico and facing fierce competition from Amazon. Despite this, MercadoLibre's e-commerce platform is growing faster in Mexico than in Brazil. There is also significant potential for growth in its ads business, which currently accounts for just over 1% of merchandise value compared to 6% to 7% at Amazon. Dorson, an industry expert, highlights the lucrative opportunity in adtech, which boasts 70% margins.
According to Pierre Schurmann, CEO of Nvni Group, Latin America has some catching up to do in terms of software expenditure. Currently, Latin America spends only 1.5% of its gross domestic product on software, while India allocates 15% towards it. Schurmann believes that this catching up will drive a tech revolution in the region.
In conclusion, Latin America's tech tigers, MercadoLibre and Nubank, are leading the way in the region's rapidly evolving tech landscape. While MercadoLibre dominates the market share and continues to expand, Nubank faces challenges both at home and in venturing into the Mexican market. However, the untapped potential in Mexico, along with the growth opportunities in adtech, software expenditure, and other tech sectors, present exciting prospects for Latin America's tech industry.