Why I bought MELI

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Thanks for the shout. As you go on to say, it would be great to find smaller businesses, but we’re just not seeing any category crushers.

I’d like to slightly amend my statement, though. Perhaps it’s true you can’t be early on the same company year after year…but you can be early (at least early-ish) on the same company more than once – especially if the market delivers an opportunity. In that light, I very much agree with your points on MercadoLibre from the post I quoted above, MajorFool’s Q4 Portfolio Update

Although it’s now just a $69b company (that’s lower than Crowdstrike’s mkt cap), MercadoLibre had $14.5b revenue in 2023 (several times as much as Crowdstrike)! Of course there are more risks with an international company that has several businesses of varying complexity (including a credit business – something I always find confusing and risky) and gets ~20% of its revenue from Argentina whose currency just got devalued by about 50%. But it’s also “the Amazon of Latin America,” a machine that’s growing rapidly and is solidly profitable, but whose net margin has only been in the mid- single digits the last 2 years and has the potential to be a lot higher, soon. Their 2022 revenue was just $10.5b, so it grew 37% in 2023, pretty staggering growth at this scale.

Valuation wise, their trailing PE is 69.4 but again net margin percentage will increase rapidly – an it will be a larger percentage of a rapidly growing revenue base. Their Fwd PE is ~40, and remember that’s based on analyst estimates (guesses), and I am sure MELI plans to beat and raise. Their Mkt Cap to TTM Free Cash Flow is just under 15! Of course FCF is lumpy but I think it suggests that this is not an expensive stock. Also, as Rex notes:

Looks like they provide GAAP (un-adjusted) EPS, so the PE numbers I gave include all these one time headwinds. I would guess that 6.8% net margin (which should have been 8.3%) could probably double in short order. Maybe more.

I took a small position this week and added to it and it’s around 4% now. Even though I think the valuation is attractive, I don’t see any reason to place a huge bet. It can always get more attractive…as it seems everything has in the last week or so. Also, as my friend https://twitter.com/drowsyinvestor is fond of pointing out, conviction should be built over time. The only reason I moved so quickly to build this to a 4% position within a week is that I’ve known about this company for many years. I would normally be far more skeptical of a non-US company…and even more skeptical of my ability to get my head around it! Especially one with as robust/complex a company and businesses within. But this one has been proving itself year after year.

And, since there are seemingly not a lot of sub $10b companies right now that are no brainers to get to $50b, I’ll take a sub-$100b compounder like MELI that I think could be a $500b company some day. Seems like a no-brainer at sub-$70b.

Thanks for pointing out the opportunity, @MajorFool20.

Bear

PS - I know many others hold this company. Please feel free to add your thoughts and/or correct any mistakes I might have made.

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My biggest concern for MELI is if they can expand outside Latin America, and I believe they are facing stiff competition from Temu (owned by Pinduoduo) as they’ve already alluded to on the last MELI conference call.

Regarding the Asian competition, I’d say we’ve seen Temu, in particular, more present in Mexico over the last few months

Anecdotally, I’ve heard about Temu using AI in some spectacular ways on different technology podcasts where they use AI to decide what to build for their customers.

Additionally, if I had to pick commerce market place companies to invest in, I’d probably be picking either Pinduoduo (PDD) or Kaspi (KSPI) for their financial metrics. For a quick comparison on their latest quarters,

MELI
Revenue +41%
Net income margin 4% (read it would have been 8%)
P/E 70x

PDD
Revenue +123%
net income margin 26%
P/E 20x

KSPI
Revenue +46%
net income margin 43%
P/E 10.5x

I’m having trouble understanding why MELI would be a superior investment to either PDD and KSPI which have significantly better net income margins, revenue growth, and valuations.

I know that PDD is Chinese, and KSPI is Kazakhstani which may be considered big drawbacks?

I’m just not seeing how MELI’s Latin America market is superior to Temu’s global reach, supply chain advantages, and AI innovations.

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  1. I’ll take the company with the margin of 4% to expand it more than the company with the margin of 26%. If MELI’s were even 20% that would be 5 times as much – meaning their PE would be roughly 70 divided by 5 which would be lower than PDD’s 20 PE. These are back of the napkin numbers but you get it. To quote Bezos, “Your margin is my opportunity.”

  2. Sure PDD still grew faster in 2023, but look at 2022: PDD grew 39% and MELI grew 49%. So MELI is gradually growing slower over time, but PDD’s growth is all over the place. I don’t know much about it, but I’m guessing TEMU juiced the growth in 2023? That’s positive from a numbers perspective, but does it inject a ton of risk since TEMU is fraught with controversy? As I said, I don’t know much about it, but it’s an important question.

  3. The real question is what will happen going forward for revenue and profits. I don’t think it’s as cut and dry as it might seem, but even if MELI’s don’t grow quite as fast as PDD’s, I think they’ll be more predictable and I think there’s less risk of a blowup or problem. Plus MELI is a company I’ve known for longer and there’s an element of comfort there.

I said in another post, “So while MELI’s profit expansion could be more explosive, you’re still getting expansion with Zscaler, and I think with fewer risks.” Well now I’m saying PDD might have more potential to explode (to the upside or downside), but I prefer the steadier MELI. But that’s just me. Everyone has to weigh up the risks and potential for themselves.

In general, I could see how you might want to allocate a bit to both (and maybe even KSPI), but as I’ve said in another post recently, the first bar to clear is quality, and I don’t know that it’s been shown convincingly for PDD or KSPI yet. Or if it has, I haven’t seen it.

Bear

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Think you answered your own question here. Automatic no for me (& many others). Especially with China.

Bnh

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I guess I’m trying to understand why a company with 8% net income margin would be considered a good number, when equivalent regional marketplaces are having the same number at 26% and 42%. If MELI is able to double their net income margin it’s still well below these other marketplaces.

Maybe to ask the question another way, why is Kaspi able to consistently get 40%+ net income margin, while MELI is in the single digits?

To quote Bezos, “Your margin is my opportunity.”

If MELI is going head to head with Temu in Mexico, how are they going to compete to get the market share? Temu already has the lowest prices of anybody, where people cannot believe their prices… it’s so much so that it seems that a lot of the controversy is that people think the company sells at a loss to collect data and that they are selling the user’s data or using it for other nefarious purposes.

Checking out the ratings of the two apps in the iPhone store,

MELI #160 in shopping, 4.8 rating
Temu #1 in shopping, 4.7 rating

My concern is if Temu has lower prices, and is already number one in the App Store and encroaching on Meli’s turf in Latin America it’s going to present a large competitive threat. Or where is the moat for MELI’s product in Mexico?

Possibly MELI is offering higher quality products then Temu, or a more localized experience. Seems a lot of the criticism of Temu is on the quality and being cheap knockoffs.

if MELI’s don’t grow quite as fast as PDD’s, I think they’ll be more predictable and I think there’s less risk of a blowup or problem.

I definitely see your point here, MELI feels like the safer of the companies and there’s less fraud risk and less controversy. I haven’t looked into MELI’s management much, but have read other people on the board mentioning they have a great team. There does feel like a boom/bust risk with PDD, and part of the reason I am not an investor there.

Yep, I’m not investing in PDD or KSPI for these country related reasons as well.

Just trying to understand how the combination of Brazil, Argentina, and Mexico is superior? From what I gather about 25% of revenue for MELI is Argentina which sounds like it’s in the midst of a political and economic crisis.

If we are already saying their numbers would have been X instead of Y, if only not for Argentina, this seems like there’s a fair amount of country related risk?

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Ok as a MELI holder I’m not worried at all about Temu/PDD or considering KSPI as an eCommerce alternative to MELI.

MercadoLibre has beaten off local competition, Amazon and Shopee from Singapore. Temu might have arrived in Mexico but they just offer extremely cheap products of dubious quality, need and provenance. They haven’t invested in a region wide physical distribution capability for every day essentials or fast delivery situations the way MELI has nor are they offering a full fintech banking service and would probably find it just as difficult as Shopee found it navigating the regional intricacies.

As investment alternatives, again I wouldn’t be interested in PDD or KSPI vs MELI for a number of reasons.

PDD
Assuming one is ok about investing in Chinese companies then I still would find it a struggle to get interested in PDD as:
i) this recent growth spurt is really just that and not the longer term record
ii) All other Chinese eCommerce companies from Ali Baba to JD to Meituan have dropped to pedestrian single or low double digit growth rates as the market is competitive and saturated.
iii) There is the risk that Government can crush the fortunes of a successful Chinese company at will with no notice (e.g. Jack Ma and Ali Baba or Ant Financial)
iv) Far too many reports of scamming credit card details and dissatisfied product quality levels abound.

KSPI
Whilst I might be interested in KSPI for its own reasons as a potential landscape dominating all in one app in Kazakhstan, I can’t see an interest in it as an alternative eCommerce play vs MELI as…
i) The local population opportunity is only 20m vs 600m in LatAm
ii) The opportunity to go international is hemmed in with the current limitations around trading with Russia and its surrounding federation
iii) Lack of clear robust and transparent investment track record there

Cheers
Ant

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Bear,
Welcome to the MELI pool. The water’s great. I think you picked a great time to start your position. I think a big part of MELI’s ecommerce mote is it’s distribution network, which no one can match. It has convenience stores where people can use computers to shop, pick up packages, and deposit money. People without physical addresses can shop there.

Probably the bigger part of the story is the payment system, Mercadopago, which is doing better that its ecommerce side. Total Payment Volume increased 47.3% in USD terms, but in currency neutral terms was 182%. Sure there’s some screwy things going on with some LA currencies, BUT MELI knows how to fluourish in spite of the fluctuations. Think what will happen (and demographics suggest they should) if the dollar weakens, even slightly compared to LA currencies. That should significantly improve our positions.

Best,
bulwnkl

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They do have some debt.
As of the end of 2023:

Long term debt: 2.9B YOY: -7.8%
Short term debt: 3.5B YOY: +28.1%
Total debt: 6.4B YOY: +9%

Net Cash is 3.85B YOY: 14.4%

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Ok now I’m quoting you quoting me. :upside_down_face:

I guess my main answer is that to paint MELI as a company with an 8% net margin is missing most of the picture. Even if we broaden our look just a little and check out FCF margin:

MELI: 32%
PDD: 38%
KSPI: 55%

…we can see that the differentiation is less vast. Again, the company quality and revenue durability are way more important to grasp than whether to look at net margin, FCF margin, operating margin, GAAP, non-GAAP, ebitda, or whatever. And also remember when you do look at any of these profit metrics, it’s only a point in time. You want to think about what the potential is for those things, not what they are right now. And potential goes both ways…we may expect a 5% or 10% or even 20% margin to expand…but a 55% margin is at the level where we probably can’t expect expansion…in fact maybe we should worry it will regress. A company with that high a net margin either has a target on its back, or is a fraud. Think about NVDA – clearly not a fraud, and clearly best in class, so we can see why net margin is over 50%. But they absolutely have a target on their back which is why we’re hearing about hyperscalers trying to make their own superchips.

I think that’s a really fair concern. That’s pretty much what has kept me out of MELI all these years. But at this point, I have taken another look and I see their track record, which speaks for itself:

image
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They have more than 20x the annual revenue they had 8 years ago. The pace is impressive, but more impressive is that they did it at all. Even if it had taken them 15 years or 20 years or more, the sheer size of the operation they’ve built proves to me that they know how to navigate even the choppy waters of Latin American politics. Given that they’ve put together such a track record of overcoming the risks, those don’t compel me these days as much as MELI’s upside does.

They just did almost $20 EPS for the year. If that 6.8% margin doubles that would be $40. If revenue also grows 30% it would become $52. That’s a FWD PE of about 27, which IMO, is too low for a company that has this kind of track record. I’m not saying I’m sure this will happen, but I think they have this kind of potential. And even if it’s not quite as good as all that in 2024, I will still likely believe they have the potential to do much better than that in 2025.

Bear

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Bear,
Apparently UBS agrees with you. They just upped MELI’s price target from $1,800 to $1,900 today.

Best,
bulwnkl

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@PaulWBryant Thank you for the thought provoking content on this company!

Their track record is certainly good over the past number of years. I don’t doubt the teams ability to execute on their goals.

However, I am not understanding why Brazil would be given a free pass from looking at the existential risk that this country faces with its government. If the logic goes that PDD and KSPI are too risky to invest in because of the countries they operate in are known for fraud, or have poor investor track records, shouldn’t we be holding Brazil to the same standard?

Since about 50% of MELI’s revenue comes from Brazil, and 25% from Argentina they are primarily a Brazilian company, even though they are headquartered in Uruguay.

Interestingly I was looking up today why there are so many more Brazilian countries listed on the Nasdaq then other BRICs. For example, in addition to MELI we have,

NU - NU Bank
DLO - DLocal
STNE - StoneCo

Plus a handful of other companies like Petrobras listed. I discovered their financial regulator is pretty open to having their companies list overseas while places like India and China restrict their companies more to list on local exchanges. That sounds like a promising feature of their system for investors.

However, I’ve also been reading up on the Elon Musk vs Brazil court case, and the dialogue coming out of this dispute, does not make Brazil seem like a place that is good to do business.

Some links here,

What Elon Musk said about censorship there,

That prompted Mr Musk to rail that censorship in is worse than in “any country in the world in which this platform operates”, and to call Mr Moraes a “dictator” who should be impeached and put “on trial for his crimes”.

Summing up some points from those two articles,

  • Brazil’s Supreme Court enjoys outsize authority over the lives of Brazilians
  • Brazil offloads important Supreme Court cases to individual judges who have full authority like Mr Moraes
  • Jair Bolsonaro “a fair-right populist” disliked the court, and threats against the justices and their families increased dramatically
  • Bolsonaro supporters camped outside military barracks for two months urging the army to stage a coup
  • In February this year, investigators revealed Bolsonaro possessed a document that outlined his plan for a coup
  • Tech companies have become “enraged” by being forced to pay influencers and journalists for their content
  • The US Congress and Brazilian Supreme Court are now set to go head to head, and the US Congress wants to see the Brazilian orders on content moderation
  • Musk said X employees were threatened to be arrested, and trying to get his employees to a safe place
  • Musk said about X in Brazil, “We will probably lose all revenue in Brazil and have to shut down our office there”
  • Moraes ordered the blocking of accounts of influential figures on social media

Overall Brazil does not sound like an ideal place for businesses. I see significant existential risks to their business from the issues the country has.

This is why I sold my shares in DLocal a few months back. Their management had assured investors they had proper hedges in places to handle any political or economic risk coming out of Argentina. They had supposedly “very safe” hedges via government bonds. Next they had to admit on an earnings call, their hedges didn’t work at all, and they lost significantly more money then they ever expected.

Again, I’m not sure why MELI is being given a pass on it’s Argentina market to say if only the economic situation would have been this, their numbers would be higher. Argentina accounts for ~25% of MELI’s revenue!

I guess my main answer is that to paint MELI as a company with an 8% net margin is missing most of the picture. Even if we broaden our look just a little and check out FCF margin

I’m still having trouble seeing why MELI being at the bottom of the list in FCF margin is an advantage. If we are saying MELI is the most mature, and durable of these businesses, wouldn’t you expect it to have both higher net income margin, and free cash flow margin of the three businesses?

The other thing I’m trying to wrap my head around is why an acceleration of revenue is seen as a bad thing, or may just as a yellow flag? I thought typically the idea with growth investing is to find companies which are accelerating revenue unexpectedly, as this often indicates they are taking up even more market share, have a superior product, or some competitive advantage.

When I see that PDD’s yoy revenue growth numbers have gone from,

58% → 66% → 94% → 123%

That is really interesting to me because it indicates they are taking massive market share from somewhere. And who is that someone they are taking market share from?

It’s new markets they are entering like Latin America, and it’s enough so that MELI is calling out on their conference call “we see a lot of Temu” lately.

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Ok Guys - I think we are in danger of conflating a lot of different points here wrt “Brazil” and “Latin America”.

First off the US Nasdaq is not only MercadoLibre’s primary it is their only listing. They are fully under the scrutiny of the SEC. (Unlike PDD for example which has a secondary or ADR US listing with the their primary in China and limited SEC oversight).

Secondly - they are in 18 markets in LatAm and market leader in every one of them (for eCommerce). They are masters in operating and competing and winning in ALL Latin American countries - not just Brazil or Mexico.

Thirdly - their registered HQ is not in Brazil but in Montevideo, Uruguay which is considered the Switzerland of South America.

Fourthly - they have operations distributed across the region - e.g. their tech operations is in Bogota, Colombia. They have the ability to withstand localised shocks and FX movements without the corporation being at risk.

Fifthly - whatever you think about the wealth status and level of economic development across the LatAm region, citizens there still need to eat and clothe themselves and order non-discretionary consumer purchases at a minimum whatever revolutions and FX crises are happening. They also have an unmet need in a next day distribution system as well as a unmet need for access to banking. These are important market opportunities for MELI that don’t necessarily exist in developed world nations with transport and banking infrastructures established as well as representing key sources of competitive MOAT like advantages for MELI.

Lastly Brazil might be a source of significant amounts of revenue but it is inevitable to a degree as it is the largest market by population size and GDP. It was also where MercadoLibre first launched MercadoCredito which was formed in 2017 in Brazil and where they received one of the earlier and more comprehensive banking licenses so it had a major head start there over the rest of the region. It was also where the largest unbanked population was. Growth rates in Brazil are moderating vs other markets so one can assume that Brazil’s share of total group revenue will come down and rebalance across LatAm.

I’m not trying to ignore the risks here but I think MercadoLibre has done everything it can to mitigate risk and turn risks into opportunities.

This is informative on a general level…

This is informative on the whole fintech side and how MELI stacks up on that front which could be especially useful for those also interested in NuBank…

Ant

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From the investor presentation linked, it shows that the revenue breakdown is roughly,

50% Brazil
25% Argentina
20% Mexico
5% Rest of Latin America

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Comparing to DLocal which has the same corporate structure as MELI, they are based out of Montevideo but do little business in Uruguay. They are a 4B company with the following revenue breakdown,

Brazil 20%
Argentina 18.5%
Asia & Africa 17.6%
Mexico 16.2%
“Other countries” 15.1%
Chile 12.5%

Trying to figure out why the presence of MELI in Chile a country of 20M, Venezuela 29M, Peru with 35M or Columbia with 50M don’t show up on their bar graph?

Argentina is 46M and makes up 25% of revenue, but those other countries are tiny single digits or aren’t even disclosed what percentage they make up.

Are these countries like Chile, Venezuela, Peru, and Columbia considered greenfield for MELI?

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I didn’t mean to characterize lower margins as an advantage for MELI. I’m just saying you have to look at the context and the potential. And of course growth acceleration is good…again, just have to sus out the likelihood of durability. KSPI and PDD could be hugely undervalued businesses. My impression is that China is uniquely problematic/risky. And Khazakstan isn’t even on my investing radar, because I know next to nothing about it. But I’d love to learn more.

I mainly just wanted to clarify those two issues. @wpr101, I appreciate the concerns you’ve brought up about Brazil, Argentina, etc. I appreciate @anthonyms (who has held MELI a long time and knows it well) weighing in on those risks. I’ll leave that to you two and others. For me? MELI seems to pass the quality bar…but that’s given what I know now. I’m ok with 4%…I probably wouldn’t be ok with 10% at this point.

Thanks all for the discussion. Keep it up!

Bear

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“Are these countries like Chile, Venezuela, Peru, and Columbia considered greenfield for MELI?”

I wouldn’t call them Greenfield as they are there. The “other” countries make up about ~4.5% of revenues which is in turn broken down into ~5.5% for eCommerce and ~3.5% for Fintech.

“Others” have certainly under grown the rest of the LatAm major markets in the last few years.

DLocal is probably not a great proxy as they thrive best in locals where there is greater inadequacy in the financial infrastructure.

Ant

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About 10 years ago, MELI had substantial business in Venezuela, and we saw what a disaster that country has become. MELI has done just fine even in spite of losing a significant country completely: @PaulWBryant posted the 10 year revenue growth on one of the posts upstream of this one. Impressive that MELI delivered in spite of losing Venezuela back then. I don’t think that the situation in Argentina is anything comparable to what Venezuela was back then. I’d expect Argentina to recover from its current economic challenges.

GauchoRico

P.S.: I agree with @anthonyms on the issues in China and I never invest in any company based there. Too much political risk. And Kazakhstan? Can’t imagine how any investor in their right mind would consider investing in any country that’s closely tied to and/or dependent on Russia.

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These are useful and valid discussions on the risks of Latin America but I think we can cease any comparisons to Kazakhstan! Just pull up a map and one can move on.

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Bear, I’m only slightly more informed about Kazakhstan than you, but fwiw, a large number of the young, well educated individuals, the “brain drain” who fled Russia at the beginning of the Ukraine invasion went to Kazakhstan and have become permanent residents there. It’s not a big thing, but it bodes well for the country.

As for @GauchoRico’s comment about dependence on Russia, I can’t refute that with high confidence, but I think the country is more independent than it may appear. Otherwise, I can’t imagine why it would be considered a safe haven for Russian emigrants.

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It is not considered a safe haven for Russians. There is an open border, and it is simply a way for Russians to avoid conscription into the army.

Radio Free Europe: More than 930,000 Russians, mostly conscript-aged men, entered Kazakhstan after 9.21.22 to avoid the risk of being drafted into the war… Since then, the majority of them have left for other countries… Nearly 146,000 of them remained in Kazakhstan three months later…

In other words, the poor are left to fight Putin’s war and those with any means, have left out a side-door that Putin left unlocked.

But, more importantly, I would suggest to you that one should have eyes wide-open when even talking about the financial reporting of a company in this region. We are talking about a whole different set of risks compared to Latin America.

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As for any Kazak company for an investment, well, I wouldn’t consider it irrespective of the relationship between the home country and Russia. I wouldn’t care how impressive their financial reports might appear. It’s absolutely no place I would even consider.

For that matter, I’m pretty leary of all non-US companies. I have held positions in Chinese companies in the past, but I wouldn’t invest in any today. My wife is Chinese and I very much enjoy spending time there. And Mr. Buffett is a pretty savvy investor, but I’m not tempted to follow him into BYD (which, in case you didn’t know, is an acronym for the English phrase "Build Your Dreams).

I currently have a position in Monday, and I had a position in Global-E (no longer in that company). So I guess I feel OK about Israeli companies. But to be honest, with the Middle East Mess right now I’m seriously considering exiting Monday. And I finally caved and took a smallish position in MELI. But I wouldn’t touch Nubank for several reasons, not the least of which is that it’s based in Brazil. It’s a great country to visit. At least it was when I was there quite a number of years ago. It probably still is. But that doesn’t mean it’s a great country for an investment.

If the US market was highly constrained and just didn’t present much in terms of investment opportunity, I would probably feel differently. But that’s not the case.

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