Mercado Libre (MELI) $1,562
Mercado Libre is a good long term investment; “Latin America's Amazon” has finally reached a reasonable price after a 38% drop in the past year, as investors punished MercadoLibre due to a drop in operating margins driven by strategic investments. I think that smells of opportunity as MELI is a premium, high quality e-commerce platform with a terrific reach and unparalleled scale in Latin America. I plan to buy the stock.
Long-Term Positives:
- These strategic investments to increase engagement and drive volumes include expanded free shipping, cross-border trade, capex on logistics, credit portfolio growth
- I believe that patient investors will be rewarded as the lower shipping threshold will increase engagement and volumes, similar to the way Amazon captured same day deliveries and shut out competition in the US.
- Plus, their capex in cross border fulfillment network has expanded cross-border volumes. In addition this has also provided lower pricing, better selection and shipping costs for customers.
The metrics look good, and reflect the fruits of these strategic investments:
- Sales accelerated with Commerce Revenue up 47% and Fintech revenue up 51% YoY,
- Commerce Revenue growth was led primarily by Brazil, which contributes over 56% of total revenue. GMV in Brazil grew at an accelerated pace of 38%, because of the lower free-shipping threshold. Items sold also surged 56%, up from 45% in the previous quarter, and unique buyers' growth accelerated to 32% YoY.
- The ads business chipped in with an excellent 73% YoY growth capitalizing on advertising budgets in Latin America shifting to digital markets.
- MELI’s network provides it with its rich first-party data, which gives it deep insight into consumer behaviour, perpetuating the flywheel.
- The Fintech segment grew 51% YoY during Q1 and with about 45% of Total Revenue.
- Its Monthly User Base expanded to a record 82.9M users, reflecting the high levels of engagement and retention, as users chose to trust their money with Mercado Pago, its fintech arm. It also gave loyal customers better rates on deposits that slower, incumbent dinosaur banks couldn't match.
- As a result its credit portfolio grew a record 87% YoY to $14.5Bn, with a record 2.7M credit cards issued during the quarter.
We are in good company with professional investors like Henry Elenbogen of Durable Partners, and Investor Michael Burry who believe that the company is a good investment.
Challenges
Its sequential drop in margins have continued for several quarters now, strangely management has kept missing estimates, driving sentiment lower, hurting investors confidence, and thus its stock price. The company needs to start at least meeting its earnings per share estimates each quarter to restore investor confidence.
The Valuation is reasonable at 36x earnings growing at 40%, (MELI as the dominant e-commerce platform in South America has always commanded a premium)
