Latin America’s Tech Revival

by Warren Seah

When you think of Latin America, world-beating technology companies may not be the first thing that comes to mind. However, two marquee regional names have defied expectations and made a remarkable comeback from the tech wreck of 2021-22. While their Asian peers continue to struggle, Nu Holdings and MercadoLibre have seen significant growth in their stock prices.

Nu Holdings, the parent company of Brazil-based financial-technology firm Nubank, has experienced a near doubling of its shares this year. Similarly, e-commerce titan MercadoLibre, which primarily operates in Brazil, has seen a 40% increase in its share price.

But it’s not just about the stock prices. These companies are also profitable. Nubank is projected to achieve its first full-year profit in 2023, according to Malcolm Dorson, head of emerging markets strategy at GlobalX exchange-traded funds. MercadoLibre, on the other hand, has been in the black since 2021 and has more than doubled its second-quarter profit year on year to $262 million.

The favorable environment in Brazil has played a crucial role in their success. The country has witnessed a significant increase in internet users, with 50 million people joining since 2019. Additionally, around 30% of the population previously had no access to traditional banking services. Furthermore, the central bank’s decision to cut the interest rate, which was as high as 13.75%, has sparked expectations of increased consumer spending.

Both companies have also demonstrated excellent management strategies. Nubank targeted the unbanked population by offering low credit limits starting at $50. As clients established credit histories, Nubank gradually expanded their credit limits. This approach has kept default rates low and allowed them to achieve a net interest margin of 19%, as reported by Autonomous Research. “They’ve got their return on equity up to 30% to 35%,” says Dorson. “People are starting to gravitate towards their offerings.”

Meanwhile, MercadoLibre has successfully leveraged its e-commerce presence to drive financial transactions. Almost half of its revenue already comes from operations such as payment processing and interest on installment payments. Furthermore, they are now venturing into Nubank’s credit-card territory.

Latin America’s tech revival is a testament to the potential and opportunities present in the region. Nu Holdings and MercadoLibre have not only defied expectations but have also positioned themselves as key players in the evolving tech landscape, both in Brazil and beyond.

The Rise of MercadoLibre in Latin America’s Tech Market

Despite the challenging economic climate, MercadoLibre has seen a significant increase in gross merchandise value, up by a quarter compared to last year. This success can be partially attributed to its ability to capture a major portion of market share previously held by Americanas, a Brazilian competitor that suffered a disturbing accounting scandal earlier this year. “Both sides of the house are firing on all cylinders right now,” says an industry expert.

However, the potential for growth extends beyond MercadoLibre’s current success. Mexico, in particular, stands as the next frontier for the booming Latin American tech industry. The country has a large untapped market, with one-quarter of its 128 million citizens yet to be connected to the internet. In addition, a staggering 70% of Mexicans remain unbanked. While Nubank, a notable player in the industry, appears to have little interest in capitalizing on this opportunity, Autonomous analyst Geoffrey Elliott expresses skepticism about underwriting credit for the underbanked population. “Underwriting credit to underbanked Mexicans is easier said than done,” he remarks.

Moreover, Nubank may also be facing challenges on its home turf as more affluent customers gravitate towards established banking institutions. The government is also considering imposing caps on credit card interest rates, which can currently exceed 100% annually. These factors raise concerns about Nubank’s market cap, which currently stands nearly seven times its book value. In contrast, the top old-school competitor, Itaú Unibanco Holding (ITUB), has a market cap ratio of 1.4. Elliott doubts that the Brazilian consumer has the capacity to absorb significant further growth in Nubank’s products.

On the other hand, MercadoLibre is already generating 18% of its revenue from Mexico and is experiencing faster growth there compared to Brazil, despite the fierce competition from Notably, the e-commerce platform has a significant growth opportunity in its ads business, which currently accounts for only 1% of merchandise value, in contrast to Amazon’s 6% to 7%. Dorson, an industry expert, highlights the potential of adtech, emphasizing its high profit margins of 70%.

Interestingly, Latin America’s spending on software is only 1.5% of its gross domestic product, significantly lower than India’s 15%. Pierre Schurmann, CEO of Nvni Group, a Brazil-based “serial acquirer,” believes that catching up in this area will unleash a broader technological revolution for the region.

With MercadoLibre leading the way and Nubank as a major player, the Latin American tech market holds immense potential for growth and development.

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