MELI

Investment Analysis Clubs Saul’s Investing Discussions
1

Hi Everyone,
I think everyone should take a hard look at MELI. I understand that lots of people think of Latin America as bit of a mess, but that mess has also kept others at bay. I’ve held it since 4/19/17. In a little under three years, it has returned 237.5%. People are deeply concerned about Amazon being a problem, but consider this:

  1. MELI has a delivery system that is able to get deliveries to some people without a physical address.
  2. 70% of Latin America is underbanked or unbanked.
  3. MELI has a network of convenience stores where customers can buy cash cards or put money into an online account and purchase goods through MELI ebay equivalent or use in a digital wallet - Amazon can’t match that anytime soon.
  4. MELI cash wallet grew 99% in local currencies last year.

This is a fabulous service for Latin America, take a look at the attached article for recent information.

https://www.fool.com/investing/2020/02/15/with-triple-digit-…

Best,
bulwnkl

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2

bulwnkl,

Thank you for posting this reference to MercadoLibre (MELI), who many have characterized as the AMZN, EBAY and PayPal of Latin America.

I too have had a LTBH position in MELI since 2012 @$83 and in true Fool fashion added to it a number of times through 2017 driving my average cost to $167. It is now a 6% position within my concentrated entire portfolio of only 13 stocks. With the shares now at $735, I STILL believe this company has tons of upside w/ only a $37B market cap. It has tremendous business optionality and diversified revenues within e-commerce and electronic payments. Like AMZN, EBAY and PayPal, MercadoLibre also has tremendous brand recognition and customer loyalty with over 320 million registered users, so much so that Latin Americans are already familiar with its emerging e-payments platform Mercado Pago which is just now beginning to tap into a enormous base of Latin American population that has no banking. Breathtaking.

Consider the following (https://www.fool.com/investing/2020/02/15/with-triple-digit-…:slight_smile:

* The opportunity in the region is so great, in fact, that it caught the attention of PayPal. Early last year, the company made a $750 million equity investment in MercadoLibre to help accelerate its growth.

*On-platform payment volume has increased 36% per year since 2015, and jumped 16% over the most recent year. Off-platform payments have increased 81% per year over the same time frame. What’s more, the increase is accelerating. Off-platform TPV was up 113% over the past year.

* Given the growing portfolio of offerings combined with MercadoLibre’s extensive reach in the region, it’s easy to see why its fintech business is just getting started."I wouldn’t blame you for thinking you missed the bus on the bump Mercado Pago has provided. MercadoLibre’s stock is up an astonishing 680% in the past four years.

But that doesn’t mean there’s no room left to grow. The company says that 7.9 million people are now using its mobile wallet, up 29% just from last quarter. And TPV is growing in the triple digits in Argentina, Mexico, and Brazil.

The runway for growth is still long. While shares aren’t cheap, I suggest anyone with a stomach for volatility buy a small starter position. MercadoLibre has grown to 8% of my family’s real-life holdings. But given the long-term potential, I don’t plan on selling any of it in the near future.

Hope this is helpful food for thought.

Fool on!

–Rockleppard

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“I understand that lots of people think of Latin America as bit of a mess, but that mess has also kept others at bay.”

Having worked and traveled in the region, I’d just say that the cultural differences, which can seem chaotic to those accustomed to North American or Western European norms, are precisely why I bought MELI in 2017 (June 5…I’m not up as much as you). I imagined only a local company could easily navigate the distinctive countries that comprise Latin America and meet local needs. I seriously hope MELI keeps Amazon at bay (it’s big enough!). My only regret is that I gradually sold half my original position when it got too large. I am definitely holding my remaining shares.

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alacartspirit,
Thanks for your post. Since you have traveled in the region, why do you think that 70% of the population is unbanked? Is it tradition? Fear of other’s knowing what you have? Distrust of banks?

What do you think drives that?

Best,

bulwnkl

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Bulwnkl,

why do you think that 70% of the population is unbanked?

I cannot speak directly to this issue in South America, but I know the answer here in the Philippines. Out in the countryside where I reside, the unbanked are far more than 70%. The economy is cash based. The banks are not very accessible. There is a rural bank in the market town but that type is not trusted for reasons I won’t go into here. To get to a “real” bank, the people need to ride public transit (jeepney) to market town, then transfer to another to go to provincial capital take another jeepney or motorcycle/tricycle to get to the bank. Time consuming and expensive. And since transactions are cash, the only value of a bank account is a safer place to store cash. Of course storing it in the house has risks and the annual cost of building a fishing platform offshore is more than the equivalent of $1,000. On the other hand, many of the fisherfolk borrow the money for the platform from people who are banked. About the only transaction that needs to be made in the “city” is the monthly payment for cell phone/internet for those who have “postpaid” accounts, but very many have “prepaid” which can be loaded in the sari-sari stores that are everywhere in the village near the homes.

For a somewhat dated description of why so many are unbanked and in the “extralegal sector”, see The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else" by Hernando de Soto. The genesis of the book is the author’s experience in Peru. Available, of course, at Amazon. The people here are not as poor as it seems. They have assets in the informal system. I saw something which to me was remarkable yesterday. Along the recently widened, 4-lane road, was a small, decrepit, bamboo house with with the entire southwest facing roof covered with solar panels. They were certainly off the expensive, unreliable grid of the electricity cooperative (whose power poles still are frequently still standing in the right hand lane which is anyway frequently used for parking or auto repair or rice drying). Well, not so much for rice drying anymore. Anyway, the houses there were squatters’ houses and the panels must be worth more than the entire row of houses… So there is wealth that cannot be leveraged, and business that is not within the realm of value added tax though the Bureau of Internal Revenue makes official attempts to cast a widening net to eliminate the income that is exempt. There are many, systemic reasons for people being unbanked. And yes it is tradition (or at least it is the way it has always been), and it is fear. Not so much of trustworthiness of the “real banks” but of the tax man: both code’s appetite and the collector’s corruption, and it is burden of compliance, receipts, etc. It all drives the extralegal sector and leads to being unbanked.

KC

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Hi bulwnkl

I’m not alacartspirit, but having lived in Chile and traveled extensively through South America let me help answer your questions:

As per this article in Clarin from May 2018 (in Spanish, so will require translation), the major reasons for not having a bank account are:

  1. Tax evasion - most countries run informal economies
  2. Lack of branches - especially in the less privileged areas and also in the countryside
  3. Long history of economic crises in the region - especially in Argentina (and more recently in Venezuela) leading to bank accounts being frozen and restrictions placed on withdrawal amounts.
  4. Distrust in the banking system

https://www.clarin.com/sociedad/52-cuenta-bancaria-crecio-br…

The article further points out the % of population without bank accounts

Chile 26%
Brazil 30%
Uruguay 36%
Bolivia 49%
Argentina 52%
Paraguay 69%

For reference worldwide average is 33%

Finally the article mentions how Mercado Libre is working on fintech solutions for those people without bank accounts (which we are now starting to see).

Hope this helps.

RV

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RV & KC,
Thanks. Both of your posts were eye opening. It’s stunning how difficult many countries are to live in. It gives me a whole new appreciation for America. It also gives me a whole new appreciation for MELI. I think I will hold it for a while longer.

Best,

bulwnkl

Long 11.1% MELI

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8

RV - this nails it. I know quite a bit about Argentina.

All 4 reasons are at play.

Effectively 70-80% of the economy is in the informal or “black” economy. Not necessarily because of the tax rate but because of the red tape hassle factor of doing business or complying with business regulations and tax accounting.

After the last sovereign crisis at the turn of the millennium when the currency was completely devalued, all the banks froze all the bank deposit accounts for over 6 months and then when they re-opened them used their Government “official” exchange rate to effectively wipe out deposit holders who became known as the “New Poor”. Banks and police are seen as the most corrupt and hated institutions in the country.

With real inflation at 50% but Government official inflation holding local currency is a risky affair. The official exchange rate in no way reflects the international exchange rate.

For these and many other reasons the Argentine property market is all transacted in USD.

As a result:-

Holding a bank account is seen as risky from an economic perspective and a wealth confiscation perspective.

Holding wealth in the form of local Pesos again is seen as currency risk.

Local Argentines do not store wealth in bank accounts and prefer if they can to not even store wealth in Pesos.

Ant

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RV - this nails it. I know quite a bit about Argentina.

All 4 reasons are at play.

A couple other things to consider:

Many places in Latin America do not have addresses nor do their owners have a clear title to their property. As a result that property is “dead money.” It cannot be used as collateral for a loan.

Since the a majority of transactions are made with hard currency the parties are effectively invisible. So about 50% of the people have no credit history.

This presents great opportunity for MercadoLibre, but there is also a great deal of rissk.

Jeb

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