MercadoLibre: The Bullish Case (Video) – Seeking Alpha

Young man shopping online

MStudioImages/E+ via Getty Images

MStudioImages/E+ via Getty Images
MercadoLibre (MELI) is an e-commerce and fintech leader in Latin America. The business is making all the right moves, but investors’ appetite for investing in high-growth companies has evaporated of late.
Meanwhile, as you’ll see MercadoLibre continues to report very compelling growth rates. What’s more, its valuation right now is the best it’s been in a long while at just 4x its 2022 revenues.
In the video below, Andres Cardinal of Data Driven Investor discusses the bullish argument for MercadoLibre:

Data by YCharts

The past two months have seen countless stocks being sold off in a dispassionate manner. The ones that have been spared this unrelenting sell-off have been the mega caps. However, once we get beyond those big names, beyond the surface of what’s holding up the indices, high-growth names have been substantially demolished.
And while in many cases the sell-off had been justified, irrespective of whatever opinion you held on MercadoLibre 12 months ago, the story right now is very different.
Since October, MercadoLibre has seen its valuation collapse by more than 40%.
In sum, if one could remark that MercadoLibre was perhaps fairly valued or even overvalued before this 40% discount, that same argument no longer holds true right now.
Difficult as it may be to believe, the risk-reward profile has now dramatically changed. If 12 months ago investors were buying first and asking questions later, investors are now preferring to ”stay out of the market” and wait for a better time. What better time, I ask you?
I’m not arguing that we’ve hit the bottom here. That’s a foolhardy statement. As you know, forecasts may tell you a great deal about the forecaster, they tell you nothing about the future, as Warren Buffett states.

MELI revenue growth rates

Michael Wiggins De Oliveira

Michael Wiggins De Oliveira
Here are the facts, MercadoLibre is growing at a very fast rate. This is not disputed by either bears or bulls. What is disputed is the rate of growth. There’s the argument to be made that as MercadoLibre starts to lap its Q4 2020 results and moves to lapping its H2 2021 results, it will be up against tough headwinds.
Accordingly, the reopening of physical retail stores is going to cause some headwinds to MercadoLibre’s growth profile, of that there’s no doubt. However, the underlying tailwinds to the business are equally strong and also worth noting.
MercadoLibre has rapidly expanded beyond its e-commerce offering. It is much more than just a marketplace for buying and selling products. It has expanded into asset management, Mercado Fondo, digital payments, Mercado Pago, and loan origination, Mercado Credito.
Accordingly, anyone that has ever considered MercadoLibre will always make the analogy that it’s the Amazon (AMZN) of Latin America. And in actuality, there’s a lot that’s similar. At its core, MercadoLibre has leveraged its user’s familiarity with the brand to cross further products.
That being said, one area that MercadoLibre is notably different from Amazon is that MercadoLibre has a credit business that’s responsible for offering loans to small and medium enterprises (”SMEs”) is one of a few distinct offerings that make MercadoLibre uniquely setup to benefit from the rapidly growing Latin America economy.

MELI Credit Portfolio

MercadoLibre Presentation Q3 2021

MercadoLibre Presentation Q3 2021
As you can see above, MercadoLibre’s Credit Portfolio’s growth is astonishing. MercadoLibre’s ability to leverage its approximately 79 million active users and cross-sell into this user base, not only commerce services but fintech services too, makes MercadoLibre unique.
Furthermore, MercadoLibre continues to seek out further opportunities to enhance user engagement with the platform. To illustrate, of late MercadoLibre has sought out partnerships with grocery chains to bring out higher frequency purchases and higher retention rates.
As you know, there’s always a cost associated with acquiring a customer. The idea is that if MercadoLibre can offer more services to increase customer retention, this will naturally increase the lifetime value of the customer.

EBIT Profits


One reason to be particularly bullish on MercadoLibre is that, unlike other e-commerce businesses that are very heavily investing for growth, MercadoLibre is already reporting EBIT profitability, as you can see above.

MELI income from operations

MercadoLibre Q3 2021

MercadoLibre Q3 2021
In fact, as of Q3 2021, its income from operations on an FX neutral basis was up 126% y/y. Consider that while MercadoLibre’s net revenues were up 73% y/y, its bottom line profitability benefitted from margin expansion and saw 126% y/y growth. This is really what investors in high-quality businesses crave.

Data by YCharts

As we enter 2022, MercadoLibre is now priced at 4x forward sales. This is towards the lowest price investors have been able to pay for MercadoLibre for some time.
I’ve used P/Sales, but you can use other measures too. Moreover, note what I described in the previous section. Right now, MercadoLibre’s profitability profile is actually fundamentally better than it was in the same period a year ago.
So you are presented with an investment opportunity in a company that’s rapidly growing, with attractive profit margins that are expanding, while the valuation is the cheapest it’s been for a while.
Here’s an excerpt that I highlighted to Deep Value Returns’ members,
When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore. (Warren Buffett)
Unlike Buffett, I fully understand the difficulty of seeing your portfolio go red. I get it. But like Buffett, I also know that it only matters how your portfolio is priced on the day you are going to exit and sell your business. And if conditions are no good on that day, then, on that day, don’t sell out of your businesses.
Don’t look at the market for evidence of what your businesses are worth. That’s called price anchoring. And price anchoring during this period will bear very little resemblance to what your businesses are actually worth. What’s more, it will kill your belief in your hard work too. Good luck and happy investing.
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This article was written by
DEEP VALUE RETURNS: The only Marketplace with real performance. There are no gimmicks and no place to hide because all I care about is delivering high performance against the S&P500.

WARNING: Any stocks that you feel like buying after discussions with me are your responsibility.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Andres Cardinal is long MELI.


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