MercadoLibre implications for SQ/SHOP/WIX etc

Investment Analysis Clubs Saul’s Investing Discussions
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I know most of you do not and would not be interested in MercadoLibre (MELI), the South American equivalent of Amazon or Ali Baba however the results that they have just released whilst of interest to MELI holders (and TChalla’s interest in local Brazilian payment competitor - PagoSeguro, PAGS) should be of even more interest to those who hold Square, Shopify as well as Wix, Ali Baba, Amazon, eBay, JD.com and Baozun.

Effectively whilst I had originally bought into the MELI story as a South American first mover in an Amazon/Ali Baba type story in ecommerce, these results made me almost completely re-evaluate the business opportunity certainly for unmet needs in emerging markets but also the relative value of fintech vs ecommerce as well as the opportunity for fintech in off line commerce.

These results have significant considerations for how you could think about the opportunities for Square (both within US and globally) as well as the internal revenue contracts within Shopify and potentially for WIX the potential missing opportunity as well as what the fintech and logistics valuation elements mean for Ali Baba.

Essentially leaving aside currency fluctuations and changes in product listing policies on the platform, whilst the constant currency GMV and item sales continued to grow well, in the space of a few quarters, MercadoLibre has gone from being an ecommerce market place operator with some shipping and payments solutions to practically becoming an off platform fintech player outright (think POS systems, wallets, asset management) and off platform logistics provider outright. Whilst ecommerce is growing in double digits (and their in house logistics taking an increasing share of fulfilment), their offline fintech solutions are growing at triple digits.

I’m not going to copy across the full highlights in the release but just take a look at the first part of their quarterly highlights…

Third Quarter 2018 Business Highlights

  • Total payment volume through MercadoPago reached $4.6 billion, a year-over-year increase of 24.1% in USD and 69.5% on an FX neutral basis. Total payment transactions increased 66.7% year-over-year, totaling 103.9 million for the quarter.
  • Successful execution in off-platform payments (online and offline) through merchant services, mobile point-of-sale devices, and mobile wallet business. On a consolidated basis, off-platform total payment volume grew 87.8% year-over-year in USD and 152.1% on an FX neutral basis.
  • In September for the first time ever MercadoPago not only processed more total payment transactions off-platform than on MELI’s marketplaces, but total payment transactions surpassed the hundred million mark in a single quarter.
  • Mobile-point-of-sale business is quickly becoming one of the fastest growing non-marketplace business units, representing 46.5% of total off-platform payment volume for the quarter and growing total payment volume on a consolidated basis 636% year-over-year on an FX neutral basis.
  • Mobile wallet reached 1 million active payers during the month of September, while total payment volume from mobile wallet in Argentina, Brazil and Mexico is growing triple digits year-over-year.
  • Launched asset management in Argentina, the first country where we have begun to offer the entire suite of fintech solutions: mobile point-of-sales devices, QR codes in store payments, mobile wallet, and asset management.

Basically the read across is that the opportunity for Square, Shopify, Wix, Amazon, eBay, PayPal, Ali Baba etc is:

  1. Add native shipping and logistics solutions to on AND OFF platform commerce opportunities
  2. Add in-house POS, payments & wallet solutions to ecommerce
  3. Consider the much much much large market of POS, payments and wallet solutions for the offline off platform market place which is infinitely larger than ecommerce
  4. Consider making the logistics and fintech solutions the front running value propositions in earning markets where consumers remain unbanked or underbanked and are underserved from a logistics provider (which reminds me of Ali Baba heavily touting their Cainiao Network fully robotic automated warehouse ahead of their approaching singles day - 11/11/18)
  5. Consider becoming a full banking solution provider off the back of fintech for merchants and consumers alike on AND OFF platform

Cheers
Ant

Here’s the announcement:-
https://seekingalpha.com/pr/17320381-mercadolibre-inc-report…

Here’s the results presentation:-
https://seekingalpha.com/article/4217375-mercadolibre-inc-20…

and here’s the ER call transcript:-
https://seekingalpha.com/article/4217375-mercadolibre-inc-20…

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Thanks Ant

Really interesting update. The South American payments space is on a steep upwards trajectory.

I was surprised and pleased to see the interest of Berkshire Hathaway in the STNE IPO - another fast growing Brazilian payments processor - trading at a premium to PAGS despite lower revenues, but higher gross margins.

Seems more SMB focused than PAGS, but I’m sure there is overlap.

I think it seems that this isn’t a zero sum game with scope for multiple winners like Alipay and TenPay.

A summary of STNE here

StoneCo IPO: The Fast-Growing Brazilian Company With Berkshire As A Potential Investor https://seekingalpha.com/article/4214595?source=ansh $STNE, $PAGS, $SQ

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I think however, the largest challenge is one of visibility of the different payment companies in Latin America… I don’t travel there enough to be able to get the visual feedback of a SQ, iZettle, or even Shop. Hard to pick a winner from thousands of miles away…but clearly the sector trend is from the bottom left to the top right.

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Hi Tchalla

Yep I was very interested in the Stone Co IPO too.

Ant

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Thanks for posting! I enjoy reading about this name.

3) Consider the much much much large market of POS, payments and wallet solutions for the offline off platform market place which is infinitely larger than ecommerce

This is an infinitely more competitive space, due to its size and competitors like V, MA, Apple, PayCom, et al, the banks, etc.

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This is an infinitely more competitive space, due to its size and competitors like V, MA, Apple, PayCom, et al, the banks, etc

True… but most of these guys are asleep at the wheel and/or do nothing to help the unbanked and underbanked. (More student loans, pay day scams and 23.9% APR cc’s anyone?)

They deserve to get disrupted.

Ant

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One other advantage to MELi over StoneCo or Pagseguro is that they are already international, whilst the other two are still Brazil only. There will be a language and culture barrier challenge once they become outward looking.

MELI is worth another look. Thanks for the heads up Ant

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Apple earnings Tim Cook just commented that they processed more transactions than paypal. Even 40 Costco stores have them apparently.

MELI is an interesting company and I am glad that I own it. It is a mix of SQ, EBAY, AMZN.

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Ant,

You mention pay day scams, but really the pay day scams that exist in the USA are nothing compared to standard interest rates where I live (Mexico). In this country, a good auto loan is 13%. A good mortgage is 11%. If you want a credit card, your looking at 35% minimum. More likely, it’s going to be in the range of 65-70%.

People here don’t use credit cards in the same way as the US. When people make big-ticket purchases, it’s generally made by establishing a payment plan with the store. In short, the payment dynamic is totally different in latin america, and these small companies are working to build these payment strategies into their platforms. This is what makes StoneCo and MercadoLibre attractive.

This is not to say that Mastercard and Visa are going to be left out. It’s just that the clientele is different. Latin America is very stratified by class. Wealthy people can afford to have and use credit cards. And, much like anywhere else, the rich are getting richer. And electronic payments are becoming more convenient. So in short, there’s a variety of markets within the whole e-payments category and there’s room for multiple winners.

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StoneCo IPO: The Fast-Growing Brazilian Company With Berkshire As A Potential Investor https://seekingalpha.com/article/4214595?source=ansh $STNE, $PAGS, $SQ

I haven’t been able to find anything evidencing that Berkshire Hathway did, in fact, invest in StoneCo.
Does anyone know whether it did?

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…and these small companies are working to build these payment strategies into their platforms

Bodhi,
I realized Mercado was taking some credit risk in doing that. Need to investigate that further. Do you have insight on that?

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Ant, why don’t you send that suggestion to Square, etc, and any others that you hold, with Mercado as an example.
Saul

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I haven’t been able to find anything evidencing that Berkshire Hathway did, in fact, invest in StoneCo. Does anyone know whether it did?

"Berkshire Hathaway has invested about $600 million in two major fintech companies, both of which are based in emerging markets. In August, Berkshire invested $300 million in Indian mobile-payment company Paytm, and just recently, Berkshire invested about $300 million in StoneCo (NASDAQ:STNE), a Brazil-based payment processing company that recently went public.

Paytm, which is a private company, is an e-commerce payment company and is similar in nature to U.S.-based PayPal. Berkshire’s $300 million investment translates to a roughly 3% to 4% stake in the company. The company has a run rate of about 5 billion transactions per year and is growing rapidly.

StoneCo went public just last week, and Berkshire Hathaway’s interest was reported even before the IPO had occurred. The company provides a variety of financial services in Brazil such as payment processing solutions like POS [point of service] terminals, with more than 200,000 merchants on its roster of customers.

StoneCo went public at an IPO price of $24 and is currently trading for more than $30, so assuming all of Berkshire’s shares were purchased at the IPO price, the company is sitting on a 25% unrealized gain on its investment already.

To be clear, it’s important to point out that these investments were reportedly not made by Warren Buffett. Rather, they were the work of Todd Combs, one of Buffett’s two trusted stock-picking lieutenants." :

https://www.fool.com/investing/2018/10/30/berkshire-hathaway…

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“Ant, why don’t you send that suggestion to Square, etc, and any others that you hold, with Mercado as an example.”

Yeh - I may well do Saul, it’s the kind of thing that I do contact IR departments about over the years, I.e. where are they with a particular opportunity and how do they see these opportunities.

Thanks
Ant

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“Ant,

You mention pay day scams, but really the pay day scams that exist in the USA are nothing compared to standard interest rates where I live (Mexico). In this country, a good auto loan is 13%. A good mortgage is 11%. If you want a credit card, your looking at 35% minimum. More likely, it’s going to be in the range of 65-70%.”

Hi Bodhibob

Yeh - I get that. I wasn’t actually meaning a reference to US. I’ve never lived there. But I have lived in times and I’ve lived in places that more fit your far more complex situation than the US landscape.

I remember in the 70s in the UK, mortgages would be double digits and you had to effectively prove that you didn’t actually need the money before you were granted a mortgage (which usually could only be had from a “building society” not a bank.

When I bought my place in Argentina I had to manoeuvre through 3 currencies as the local property is priced and transacted in dollars even though settled in local currency - no one could get mortgages at the time.

In the UK in the 90s whilst mortgages were single digits my government backed education loan bank loan was 18% APR.

In Singapore - one of the richest countries in the world mortgages are 2% and I can borrow off credit card at 4.68% Apr but on the High Street pay day loans are 4% per month and a whole lot more in the local newspapers.

It’s an international financial center but local Chinatown is full of manual commmission free money changers as people hussle through FX on the High Street.

Meanwhile Filipino and Indonesian maids are being hit with 30% remittance fees by western union to do electronic wire transfers. At the same time you have various countries operating on and off lock downs on capital flight (Argentina, China, Indonesia etc).

In China - you can pay for anything with We Chat pay onyour phone but to have a wallet and payment account you may not need a local phone but you have to have a local bank account linked to it. Kind of a catch 22. You either have both a bank account and a mobile wallet or you have neither.

There’s infinite opportunities world wide and we haven’t even talked about US student debt or auto loans or insurance premiums.

Maybe there’s an opportunity for us to set up a cross border borrowing access arbitrage and remittance operation.

In short there are 2 parallel universes living side by side of banked and unbanked that isn’t always Geo based.

Ant

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Ant, why don’t you send that suggestion to Square, etc, and any others that you hold, with Mercado as an example

did you miss the sarcasm symbol?

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did you miss the sarcasm symbol?

Kingran, because you are sarcastic doesn’t mean I was! I thought giving Square, for instance, a good idea what Mercado was doing, might enhance the future value of my Square shares, if they got some ideas from it. There wasn’t the SLIGHTEST sarcasm involved!
Saul

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Yeh it’s ok Saul - with the greatest respect to Kingran (who’s long time contributions i appreciate), I got where you were coming from.

I agree SQ and SHOPIfY and maybe even more than any WIX could benefit.
Ant

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Guys for those of you wanting to compare PAGS vs STNE, you might want to read the comments section of this article on SA.
https://seekingalpha.com/article/4213904-pagseguro-fintech-d…
Ant

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…and if you want to look at the fintech space, by sector, by GEO and compares Square to others (PayPal, Wirecard, Guidewire etc)…

https://seekingalpha.com/article/4218148-follow-berkshire-fi…

Ant

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