What do you think of when I say Latin America? Probably not world-beating technology companies. Think again.
Two marquee regional names have come roaring back from the tech wreck of 2021-22 while Asian peers continue to struggle. Shares in
Nu Holdings
(ticker: NU), parent company of Brazil-based financial-technology firm Nubank, have nearly doubled this year.
MercadoLibre
(MELI), the e-commerce titan that does most of its business in Brazil, is up 40%.
They make money, too. Nubank is headed for its first full-year profit in 2023, says Malcolm Dorson, head of emerging markets strategy at GlobalX exchange-traded funds. MercadoLibre, in the black since 2021, more than doubled second-quarter profit year on year to $262 million.
The Brazilian environment is helpful. The Latin American giant has added 50 million internet users since 2019. About 30% of the population never had a conventional bank account. The central bank has started to cut a crushing 13.75% interest rate, spurring expectations of more consumer spending.
Management at the two firms is also terrific. Nubank edged into the unbanked population with credit limits as low as $50, Dorson says, gradually expanding as clients established credit histories. That has kept defaults low enough to reach a net interest margin of 19%, according to Autonomous Research. “They’ve got their return on equity up to 30% to 35%,” says Dorson. “People are starting to drink the Kool-Aid.”
MercadoLibre stands out for its success in leveraging e-commerce presence into financial transactions, says Marvin Fong, e-commerce analyst at BTG. Nearly half of its revenue already comes from operations like payment processing or interest on installment payments, and it’s pressing into Nubank’s credit-card turf.
The core marketplace isn’t doing badly, either, with gross merchandise value up by a quarter since last year. MercadoLibre gobbled most of the market share from Americanas, a Brazilian competitor that collapsed after a massive accounting scandal earlier this year. “Both sides of the house are firing on all cylinders right now,” Fong says.
Mexico should be the next frontier for the LatAm tech tigers. A quarter of its 128 million citizens are still off internet, and fully 70% are unbanked. Nubank shows little sign of capitalizing, though, says Autonomous analyst Geoffrey Elliott. “Underwriting credit to underbanked Mexicans is easier said than done,” he says.
Nubank may also be losing steam at home as more-affluent customers prefer established banks, and the government ponders caps on credit-card interest rates that can exceed 100% annually—at least enough to question a market cap nearly seven times book value. (The ratio for top old-school competitor
Itaú Unibanco Holding
(ITUB) is 1.4.) “We are skeptical that the Brazilian consumer has capacity to absorb significant further growth in [Nubank’s] products,” Elliott says.
MercadoLibre already pulls 18% of its revenue from Mexico. It’s growing there a little faster than in Brazil, despite fiercer competition from
Amazon.com
(AMZN). The e-commerce platform also has ample headroom in its ads business, which barely exceeds 1% of merchandise value, compared with 6% to 7% at Amazon. “Adtech is a big opportunity with 70% margins,” Dorson says.
Latin America spends just 1.5% of gross domestic product on software, compared with 15% in India, notes Pierre Schurmann, chief executive of
Nvni Group
(NVNI), a Brazil-based “serial acquirer” that listed on Nasdaq this week. Catch-up will spur a broad tech flowering, he argues.
Maybe. For now, two companies are pointing the way.
Email: [email protected]
Read the full article here
