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Boosted by the pandemic, Latin American techs are leaving commodities in the rearview mirror

Mercado Libre as the region's most valuable company has a symbolic value, and experts believe that digital businesses' growth is consistent and should continue with the new habits introduced by social distancing

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In the first week of August, Argentine Mercado Libre took the position of the most valuable company in Latin America from Brazilian Vale. The region’s largest e-commerce platform was valued at $60.6 billion, against $59.3 billion of the mining company.

Few things could be more symbolic than a tech-based company overcoming in valuation another firm whose business is centered in the extraction and production of commodities. In the United States, something similar happened in 2011, when Apple surpassed the oil giant Exxon in market value for the first time.

Publicly traded on Nasdaq, Mercado Libre achieved excellent results in the second quarter of 2020: its shares appreciated 101.8% between April and June.

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The Sars-CoV-2 pandemic also resulted in a significant appreciation of shares of Brazilian tech companies starting from March, when the outbreak began to impact more significantly the country. Locaweb, which went public in February this year, appreciated by 142% between March 13 and August 21.

Also noteworthy are Linx, a developer of management software, which saw a 49% appreciation, and TOTVS, another software company, up by 45%, in the same period. In this case, TOTVS made a recent offer for the acquisition of Linx, in a bid rivaling that of fintech Stone – whose shares appreciated 105% in Nasdaq. Sinqia, a provider of software and technology for financial systems, in its turn, rose by 53%. All outperformed iBovespa, the benchmark index for the Brazilian stock market, which rose 23% since the beginning of social isolation measures in Brazil.

Retailer Magazine Luiza, now better known as Magalu, is another Brazilian company that has registered good results. In the list of the most valuable companies in Latin America, it appeared in 11th place, valued at $26 billion. Magalu’s total sales from April to June 2020 amounted to BRL 8.6 billion, a 49% increase over the same period in 2019

It would already be quite an expressive growth in a normal situation, but amid a pandemic the feat is even more impressive, since the chain’s physical stores remained closed for months. The result, of course, is a reflection of the heavy investment in e-commerce that the company has been making.

For experts, there is a good outlook for technology companies in Latin America in general. That’s because the Covid-19 pandemic changed consumption and leisure habits. The assessment is that many of them, such as greater adherence to purchases made on websites and apps, should remain the norm even after the crisis.

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José Falcão, a specialist in variable income at broker Easynvest. Photo: Courtesy

“This is not an isolated growth, restricted to Mercado Libre, for example, or specific to this moment. I believe it is a transformation that is here to stay, even though the intensity may decrease as time goes by”, says José Falcão, a specialist in variable income at broker Easynvest. “Companies that had plans to expand online sales have advanced a lot in the coronavirus crisis. People were ‘forced’ to change their habits and started to buy more online, even though that possibility already existed.”

Analysts say investors have begun to view the technology market as a more defensive (or resilient) sector in the short term, suffering less impact on revenues. Consequently, they started to add technology companies to their portfolio, even though Brazil and other Latin American countries do not have a tradition of exporting products and services in the area – in general, Latin American nations have expertise in commodities.

What happened was that technology companies started to gain investors’ attention due to the global trend, with an optimistic “eye-opening” that points to a future perspective.

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“The growth of tech companies in Latin America has been and will be increasingly consistent. Of course, the pandemic favors this, but the migration we had from offline shopping to online commerce was already a movement that would exist anyway; the pandemic only accelerated this process,” says José Sarkis Arakelian, professor at Fundação Armando Alvares Penteado (FAAP). “Much of the volume that migrated abruptly from physical to online retail tends not to return, even with the end of the pandemic. And this, surely, is reflected in the value of the shares of these companies. ”

José Sarkis Arakelian, professor of business administration at Fundação Armando Alvares Penteado (FAAP). Photo: Courtesy

Falcão, from EasyInvest, adds that the transformation makes the positive outlook for companies that operate in the online environment in the medium and long term more sustainable. The good performance of Mercado Libre and other companies with such characteristics is a reflection of this context, which tends to be consolidated over time.

Emanuelle Nava Smaniotto, professor at the School of Business and Management at the University of Vale do Rio dos Sinos (Unisinos), follows the same line and says that Latin America is on the path of a worldwide trend of greater valuations in the digital environment. “The rise in market values ​​of these companies had the pandemic as a catalyst, since the current situation has increased demand for digital products and services, which for many consumption baskets is a permanent change”, she says

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“But there is also a change in value perception: the market is staring at companies that generate innovation and remain on the technological frontier, realizing greater growth potential and, thus, betting on them.”

Emanuelle Nava Smaniotto, professor at the School of Business and Management at the University of Vale do Rio dos Sinos (Unisinos)

Is it worth investing in techs?

Alexandre Marquesi, from Escola Superior de Propaganda e Marketing (ESPM), points out that the success of e-commerce was best achieved by those who had already adopted a strong strategy in this realm. “Mercado Libre did not appear overnight. It is over 20 years old, has undergone several transformations and its most expressive growth comes from the last four, five years”, he says.

Regarding investing in Brazilian tech, Emanuelle Nava Smaniotto, from Unisinos, says that these companies will have good projections of future returns, given the new scenario that is being established. Smaniotto reinforces, however, that the market is uncertain and all companies are subject to systemic risks.

Emanuelle Nava Smaniotto, professor at the School of Business and Management at the University of Vale do Rio dos Sinos (Unisinos)

“Certainly more traditional and consolidated companies, for whom the market is well defined, do not carry out as many reinvestments and distribute dividends, and those may be less risky to invest on. They are not, however, the ones in which the investor expects large percentages of return. Tech companies, on the other hand, are constantly reinvesting for innovation and, with good market prospects, they certainly have projections for greater returns ”, he says.

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José Falcão, from Easynvest, considers that the technology industry is risky because it is historically more volatile, since many innovations expire quickly and companies require very large investments in Research & Development (R&D).“When thinking about technology, the investor assesses the future prospects, the opportunities for growth. Companies like B2W and Via Varejo restructured to become more efficient and generate more results ahead”, he concludes.