Hi Everyone,
Here’s of my favorite growth stocks, Mercado Libre (literally translated to “Free Market”). Its businesses support e-commerce, online auctions, and fintech. It was founded in 1999 by CEO Marcus Galperin while attending Stanford. It has increased about 11 times over the last 5 years.
YTD Return: 125%
Latin America Quick Facts:
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Latin America’s middle class has grown from 22% of the population to 26% of the population or about 50 M people in the last 10 years (Euromonitor International).
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59% or 384 M people in Latin America have internet access.
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GDP is about $5.6 T or about 27% of the US GDP.
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70% of adults are unbanked.
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Online sales reached $70B in 2019 and are expected to grow to $116B by 2023 (Statistica).
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Latin American economies shrunk by about 8% last year, but are expected to grow 3% this year (SP Global).
Mercado Libre (ecommerce market place): Logistics, e-stores, and e-auctions are included in this group though technically they are 3 distinct divisions: Mercado Libre, Mercado Envious (Logistics), and Mercado Shops (online stores). MELI sells basic goods like Amazon and has online auctions like eBay in 18 countries. Its story suddenly got a more interesting during the first quarter of 2019 for two reasons:
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It’s Product mix was changed so that only products that were economical to ship would be sold. This damaged revenues in the during the quarter but laid the groundwork for the strong margins seen today.
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PayPal invested $750M in MELI on 3/12/19. This money was promptly invested in marketing and logistics infrastructure. The investments turned out to be perfectly timed for the pandemic. It opened 1,300 package drop off locations in Brazil, at a time when it was easier to develop these facilities. It supports free shipping for 62% of products sold. In Brazil and Mexico, MELI purchased 4 cargo aircraft in each country to service their largest markets. In Mexico, deliveries are made within 24 hours, and in Brazil, they are made within 48 hours.
Gross Merchandize Volume increased from 20 to 62% (in US dollars) over the last year. Growth and returns of all MELI secotros rival many SaaS company’s growth. In currency neutral terms, GMV went from 20% to 117% growth. They have about 26% market share of online sales. As COVID increased the digitization of large companies, Latin America increased adoption of online commerce.
Gross Merchandize Volume ($B)
Q1 Q2 Q3 Q4
2019 3.1 3.4 3.6 3.9
2020 3.4 5 5.9
GMV Change YOY in USD (%)
Q1 Q2 Q3 Q4
2019 -2 8 22 20
2020 11 49 62
GMV Currency Neutral Change (%)
Q1 Q2 Q3 Q4
2019 18 33 37 40
2020 34.2 102 117
Growth shows up in volume of goods as well. Even though the product mix has shifted to higher priced items, which can be economically shipped, as evidenced by the underwhelming numbers in the first and second quarters of 2019, the growth has exploded in 2020. It’s important to note that shipping has occurred unabated in 2020 for MELI, while AMZN has had difficulty delivering its product. Finally, MELI has adopted its distribution system so that people who may not have a physical address can use its marketplace.
Number of Items Sold (M items)
Q1 Q2 Q3 Q4
2019 83 89 98 110
2020 105.7 179 206
Change in Number of Items Sold (YOY %)
Q1 Q2 Q3 Q4
2019 3 4 17 28
2020 28 101 110
Mercado Pago and Mercado Credito (Fintech): These divisions provide an online payment system, a mobile wallet, online banking, online brokerage, and a credit arm (credit for small businesses and customers). Mercado Pago is a mobile payment system similar to PayPal, Apple Pay, and Square. Since PayPal just invested in Mercado Libre and opened PayPal’s payment system for cross platform transfers, you can be sure the system is first rate. 55% of digital wallet usage is for off platform payments, so Mercado Pago is becoming widely used in everyday businesses. Mercado Pago’s partnership with PayPal for international payments to travel seamlessly through the two systems began March, 2020.
Additionally, MELI has a series of convenience stores where a person can give the cashier hard currency and the money is applied to the customer’s account for either online purchases or use with a digital wallet. This payment system is invaluable for a market where many people don’t have banks, much less credit cards. Amazon does not have anything like it.
Total payment volume in US dollars went from 64% to 92% over the last year. TPV in FX neutral terms went from 99% to 161%. Either way you slice it, these are superb results.
Total Payment Volume ($B)
Q1 Q2 Q3 Q4
2019 5.5 6.5 7.6 8.7
2020 8.1 11.2 14.5
Total Payment Change in USD ($)
Q1 Q2 Q3 Q4
2019 35 47 66 64
2020 44 72 92
Total Payment Volume Change FX Neutral (%)
Q1 Q2 Q3 Q4
2019 83 90 95 99
2020 82 142 161
Off platform use is growing too. Now more transactions are made away from MELI marketplace than in it. This is super convenient and safer than carrying wads of cash around.
Off Platform Total Payment Volume ($B)
Q1 Q2 Q3 Q4
2019 2.5 3.2 4.0 4.7
2020 5 6 8
Off Platform Total Payment Volume Change in USD (%)
Q1 Q2 Q3 Q4
2019 119 122 140 121
2020 84 92 114
Off Platform Total Payment Volume Change FX Neutral (%)
2019 194 198 190 176
2020 140 175 163
Mercado Publicidad (advertising): This is an advertising service that does not seem to be significant to the business at this time.
Revenue Growth
In US dollars, revenue has growth has grown from 38% to 85% over the last year. Are you worried about how badly currency affects MELI? On an FX neutral basis revenues growth accelerated from 70.5% to 148.5%. Consider that for a minute. This is a time where the dollar is STRONG. Think about the results when the dollar weakens just a little bit? Currencies alone are not a good reason for an investment, but it is good to know.
Revenues ($M)
Q1 Q2 Q3 Q4
2019 474 545 603 674
2020 652 878 1120
Revenue Change YOY in USD (%)
Q1 Q2 Q3 Q4
2019 48 63 70 58
2020 37.6 61.1 85
Revenue Change YOY FX Neutral (%)
Q1 Q2 Q3 Q4
2019 93 102 91 84
2020 70.5 123.4 148.5
Profit
Again, efficiency was increased due to investment in logistics, marketing, and eliminating low value products that could not be economically shipped in Q3 2019. At the same time, investments were made in warehouses, drop off locations and delivery infrastructure. Initially, this was done to out Amazon, Amazon, but the most important effect of this was to reduce operating expenses as a percentage of revenue from 61% to 36% this year.
Operating Expenses (% of Revenue)
Q1 Q2 Q3 Q4
2019 48 52 61 56
2020 51 37 36
It looks like the bulk of the investments are behind them, and now they will start a modest share repurchase plan and MELI should see significant growth in profits. As many would point out, the exchange rate will effect these numbers greatly. That said, these last 5 years, when the strong dollar hit MELI hard, it grew over 11 times.
Profits ($/share)
Q1 Q2 Q3 Q4
2019 0.13 0.31 -2.96 -1.11
2020 -0.44 1.11 0.28
What comes next? Although there is a certain level of corruption and periodic strife in Latin America, it is growing it’s economies and middle class (I could say the exact same thing about Wisconsin, LOL). MELI believes it’s invested most of the money it needs to for infrastructure for the time being, and is now starting a small share repurchase program. Growth seems like it will stay strong as the Latin American financial and commerce system evolves. I am happy to stay the course.
Regardless of US policy, I believe companies will diversify their supply chains away from China. Reliance on China for so much manufacturing infrastructure is not wise. Where else could first world countries diversify there manufacturing base? Africa? Not enough infrastructure. India? Yup. South east asia? Some. Latin America? Yup. I think five years from now, Latin America’s growth will be juiced a little bit by this effect.
MELI’s been a good grower, provides a badly needed service, and diversifies me a little outside of SaaS (though SaaS stocks are the majority of my portfolio). It might deserve a place in your portfolio too.
Best,
bulwnkl