Addressing MELI Concerns

Investment Analysis Clubs Saul’s Investing Discussions
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Hi Everyone,
I thought I would take a minute and answer some legitimate concerns about Mercadolibre.

First objection, “Sure Mercadolibre has been a good stock, but how can it possibly have that much growth left in it?”

To answer this objection, I will compare it to its largest US counterpart, Amazon. Amazon has two major components: on-line retail sales (it’s own brands and third party brands) and Amazon Web Services (compute, storage, and database services). Mercadolibre has an ecommerce business and electronic payment businesses. There are other components to both ecommerce businesses such as logistics and advertising, but the comparison of ecommerce and electronics payments vs. ecommerce and web services is good enough to make my point. Not exactly apples to apples, but close enough to illustrate why Mercadolibre has a long way to go. I think that the electronic payments business is likely to be a better long-term business that web services.

Market Cap and Revenue Growth: Amazon has a market cap of about $1.5T and Mercadolibre has a market cap of $75.6B. In other words, Mercadolibre’s market cap is 5% of Amazon’s. Based on US dollars, Mercadolibre is expected to grow revenues in the 50 – 60% range for the next several years. Amazon is expected to grow revenues by about 11% for the next several years.

GDP of Latin America vs. GDP of the United States: US GDP is about $27.62T and is expected to grow by 0.8% in 2024. Latin America and Caribbean GDP is about 6.0T and is expected to grow by 2% in 2024. The GDP of Latin America is about 23% of the United States.

Profit Margin: Amazon has an operating profit margin of 4.8%, Mercadolibre has an operating margin of 18.2%. Amazon has a gross margin of 46.2% compared to 50.8% for Mercadolibre.

Second objection, “Currency problems will kill any value Mercadolibre can create!”

All of the aforementioned, results are in US dollars. When results are not adjusted for the strong dollar, growth is much higher. In 2024, US interest rates are expected to ease. This is likely to cause Latin American currencies to strengthen against the dollar, which should provided a STRONG tailwind for Mercadolibre’s stock price.

Third objection, “Won’t Amazon or Sea Limited enter Latin American markets and wipe out Mercadolibre?” Amazon and Sea Limited have been in Latin America for several years. They continue to loose market share to Mercadolibre. Sea Limited and Amazon simply cannot match a distribution system that consistently delivers to people without a physical address or a payments system that is growing by leaps and bounds.

Summary: The combination of strong operating margins, consistent growth for years to come, currency tailwinds, demographic tailwinds, and strong economies has me very pleased with Mercadolibre, my largest holding, at 22% of my portfolio.

Best bulwnkl

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Back in 2021, there was a lot of talk about SE giving MELI a run for its money in Brazil or AMZN in Mexico. Interesting how none of those takes bothered to account for the fact that MELI is the home-turf player. And the more complicated the economic and business realities, the grater the home field advantage.

I don’t know why electronic payments would be a better long-term business than AWS, that is like saying you would rather own PYPL over a split-over AWS, but it certainly provides that key second component to the business. And there should be a long way to go before that gets saturated. There was a question TMF asked of the CFO back when TMF Zoom TV was new: would MELI consider its version of AWS? The answer was in the sense that MELI is focused squarely on e-payments and that the opportunity is of such a scope that they have no intention of splitting their attention. It certainly seems logical that e-payments would be a more pressing concern in the region.

Interestingly, SE’s third major pillar, gaming, once touted as a decisive advantage, proved a massive short-term cause for revenue volatility that went both ways. I don’t own SE.

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Hi bulnkl,

Some of ur statements are debatable - e.g. “electronic payments business is likely to be a better long-term business than web services (AWS, hyperscaler)”. I don’t agree here.

Some of ur statements are just incorrect - u r saying that MELI is expected to grow 50-60% in next several years. Analysts expect to grow top line 20-30% in next several years.

I am long MELI but 50-60% growth expectations considering business model, moat and profitability would bring valuation above 100b for sure.

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LearningInvest0r,
Thanks for your note. Your rational is well thought out. Well we can can certainly disagree on the e-payments, and there’s also ebanking. Who knows? It will be big.

As to the growth rate being, 50-60%, you’re right the analysts would place the growth rate at 20-30%, and I should have said that I expect earnings growth to be 50-60%. Why do I differ from the analysts? Analysts models use US dollars maintaining its strength as a strong reserve currency and Latin American currencies continuing to be weak. Looking at currencies:

Revenue Growth 39.3% USD, 69.1% FXN
Total Payment Volume 46.8% USD, 96.1% FXN
Gross Merch. Volume 32.1% USD, 43% FXN

The USD strength is largely due to the increase in interest rates. Most economists believe that we are done or almost done with the rate increases, and in 2024 it is more likely to lower interest rates. I don’t know when rates go lower, but when they do, it will be a tremendous boost to MELI. So yeah, with the continued growth in Mexico, Brazil, and the growth of an up and comer Columbia will put us in the 50% range. It’s important to note that 73% of TPV is now off market place, meaning the payments are being used for any number of goods and services. By the way, off market place transaction growth this quarter is 120.8%.

So you’re right analysts expect 20-30% based on the continued strength in the US dollar. I think the stronger Latin American economies (2% GDP growth vs. 0.8% for the US in 2024), stronger Latin American currencies, and expansion of services to the unbanked Latin American people, will deliver growth on the order of 50%.

But if the analysts are right and I’m wrong, 25% growth is not a bad consolation prize.

Thanks again for your comments. I think this is excellent discussion.

Best,
bulwnkl

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A nice conversation for my largest long term holding. I bought this over 10 years ago and MELI is my #1 all time winner, 1355-1550% gain since 2015.

I also own AMZN but these days I have reduced my AMZN to a small position given the on going AMZN optimizations in the enterprise. At my last cyber security company in ~2018, I was driving AWS optimizations against a development organization that was spinning up AWS instances like a bunch of drunken sailors. Development and test process instances would get created, forgotten, and then never deleted. Amazon charges by instances and data transfers and would send the bill every month to some unwitting finance assistant for payment (out of sight, out of mind). So I guess we started early but it took a substantial commitment to audit AWS processes every week. Amazon did nothing to help optimize and it was kind of build your own audit reports. The approached sinful engineer would respond “ohhhhh… did I do that?”

The surprising thing about MELI is its ability to anticipate and overcome the economic calamities of central and south America. A real eye opener for me was while on a vacation to Argentina/Chile in 2019. Argentina just elected a left wing president that promised more spending and would overturn tight money management. Unemployment was 25+% and the money was flowing and so was inflation. Folks did not use or trust the banks (e.g. no checking accounts). But everyone was moving to MELI Pago payments. As we converted dollars to Peso, the locals were using the same small exchange booths to service Pago and get dollars. In Chile riots were tearing Santiago apart and the same thing with Pago. So MELI knows the politics, economies, and currencies of their part of the world and I have no worries. I will hold MELI for a long time as well as my kids.

Payment and eCommerce penetration is still below the western nations so the growth runway will continue at least for a couple more years.

BTW I also own Sea Limited SE. I sold all of my SE in 2022 during the market decline for a nice profit. I bought some SE again a few months ago as I am hopeful of FreeFire Garena gaming uptick in India (restrictions lifted) and steady growth in southeast Asia. But the competitive eCommerce environment there makes me nervous. The SE payments system is not as ubiquitous as MELI in southeast Asia (or at least in Thailand that we frequently visit). I cannot recommend SE as it is pure speculative buy. SE is a totally different animal in a different market position than MELI. MELI has effectively conquered the competition or kept them at bay.

I hope my anecdotal comments add some color and are useful to some. The numbers and buy thesis is well stated above. I recommend MELI on pullbacks. MELI is one of my foundation stocks.

-zane

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