💰 MELI | Is Mercado Libre the Next Square Stock?

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I'm about to show you something very interesting. If you take look at my YouTube statistics,
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here are the top 5 countries that watch this channel. Almost 75% of my audience comes
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from the United States, Canada, the U K, Australia, or Singapore. That's a pretty good spread,
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right? Well, the thing these 5 countries have in common is they have an incredibly high
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internet penetration rate. About 90% of people in the US, Australia, and Singapore
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have access to the internet. About 95% of Canadians and people in the UK have internet.
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That means 3 in 4 people watching me right now are probably not too aware that, in the
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rest of the world, the internet penetration rate is still only at around 60% percent.
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Asia represents over half the world's population and only about two thirds of people in the
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various Asia regions have access to the internet. In South America, about 72% of people have
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access to the internet and in some Central American countries, that number is as low
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as 62%. That means there's this extra level of potential growth when you look at digitally-native
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companies that do business in these emerging markets, because their total addressable market
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will grow over time simply as more people in those countries continue to gain access
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to the internet.
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Another thing many of these low-internet regions have in common is their inefficient, fragmented,
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and hard-to-navigate banking systems. That makes sense, because the internet is
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something that has revolutionized banking over the last 20 years… for the people and
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businesses with access to it. So, if we think about the the percent of people in each
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region that are still un-banked, we should see a similar pattern as with internet access,
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meaning the lower the internet access per capita, the more likely someone is to be underbanked.
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Sure enough, roughly 60% of Latin America and Southeast Asia are completely unbanked
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and that number is substantially higher for the middle east and sub-saharan Africa.
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Compare that to the single-digit percentages found in countries like the US and Canada.
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The third thing I want to point out is that these same regions have a significantly lower
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median wealth per adult than the regions my audience is in specifically and for most YouTube
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investors in general. In fact, the median wealth of someone in Southeast Asia, Latin
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America, or Africa, is roughly 10 times smaller than someone in the US, Canada, the UK, and
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so on. People tend to save around 20% or less of their wealth, so people in Latin
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America, Asia, and Africa are saving far less than $6,000 per year on average. Here's
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how this all fits together.
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According to ARK Invest's research, big retail banks try to acquire customers that can put
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around $6500 USD into a funded account. But, as I just showed you, most of the world
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squirrels away much less than $6000. Digitally-native Fintech companies like Square and Paypal can
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profit off accounts as small as $20 dollars. That staggering difference is because a big
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retail bank needs to cover the costs of all their big buildings, the staff inside those
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buildings, their large networks of ATM machines, advertising by physical mail, and so on, while
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new Fintech companies just don't have those costs, so it takes much less for them to turn
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a profit. The big takeaway here is that big banks simply can't afford to go after
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these emerging markets I just mentioned while Fintech companies can. So, with that context
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in mind, I'll be talking about another great Fintech opportunity; this time in Latin America.
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The name of the company is Mercado Libre, which literally means “free market” in Portuguese.
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Mercado Libre, ticker symbol M E L I, is currently the 7th biggest position in ARKF, ARK Invest's
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Fintech Innovation fund, and the 32nd biggest position in ARKW, ARK Invest's fund themed
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around advanced internet applications. All together, ARK Invest has just under $200
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million dollars in Mercado Libre, making it Cathie Wood's 52nd biggest position overall.
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It's also vying for a top spot in the $100 thousand dollar public portfolio I'm opening
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when Ticker Symbol YOU hits 100,000 subscribers, which I'll talk more about at the end of the
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episode.
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Since your time is valuable, let's dive right into Mercado Libre. If you go to Mercadolibre
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dot com dot mx, it looks a lot like Amazon, so a lot of stock analysts and experts call
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it the Amazon of Latin America. That's not really a good assessment of Mercadolibre
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for a few reasons. First, it doesn't sell its own products, so it never competes with
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the other sellers on its platform. A lot of official brands and bigger businesses move
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away from listing items on Amazon.com or even using Amazon Web Services because they feel
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that Amazon undercuts their business in the long run. 28% of MercadoLibre's gross marketplace
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volume comes from these types of brands and businesses. Second, MercadoLibre allows
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hobby sellers and direct consumer-to-consumer sales, kind of like eBay. Those hobby
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sellers make up another 6% of the marketplace. Third, Mercadolibre is as much a Fintech ecosystem
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as it is the largest e-commerce site in Latin America. On the seller side, they help
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set up and maintain digital store fronts, partner with leading carriers to provide reliable
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logistics solutions, have a built-in advertising solution, and can even provide cash advances
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and working capital loans.
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On the buyer side, they provide that Amazon-like market place, but they also provide a wide
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variety of financial services like mobile payments and credit cards. Mercadolibre's
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services need to cover the entire value chain of commerce on both sides because they're
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operating in an environment with much lower internet penetration. In fact, Mercado
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Libre specifically calls this out as one of their biggest tailwinds in some of their biggest
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markets, including Argentina, Brazil, and Mexico. Their goal is to grow the percentage
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of internet users that are making online purchases in general, so their services get rid of whatever
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bottlenecks and painpoints stand in the way. The reason Mercadolibre thinks like this is
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because their services get visited more than most of their top competitors COMBINED, so
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every person who gains access to the internet in Latin America is very likely to also become
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a new customer for Mercadolibre and growing your market share in growing market is one
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way to achieve exponential growth. Because their ecosystem spans both the buyer side
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and the seller side of every transaction, I think Mercadolibre is much closer to being
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the Square of Latin America than the Amazon. Or maybe the Paypal and eBay of Latin America,
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if they were still the same company. Let's take a look at each business unit in a little
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more detail before diving into Mercadolibre's risks, financials, and future outlook.
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I already gave an overview of the Marketplace, but let me spend a minute talking about the
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App. Here are reviews for Amazon's app on Google Play. It has almost 2.5 million
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reviews and averages a 4.4 out of 5. That's pretty good. Here's Ebay's app. 4 million
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reviews averaging a 4.6 out of 5. That's pretty good. Here's MercadoLibre's app, with
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an average of 4.8 out of 5 with over 13 million reviews!! WOW. The reason I'm bringing this
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up is because Mercadolibre is relentless when it comes to focusing on the best user experience
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possible and if any business wants to dethrone them, they'll need to provide an even better
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user experience than this 4.8, since many people will end up trying MercadoLibre first.
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The marketplace has grown 46% year over year, even as the tailwinds from the Pandemic have
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started to slow. This FXN just means foreign-exchange-neutral, since MercadoLibre operates in many countries
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with different currencies. If we go by items sold instead of gross marketplace volume,
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the marketplace has still grown by almost 40% year over year. The other thing I'll
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point out about the Marketplace is it's responsible for a lot of the network effects MercadoLibre
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enjoys. Since it's already the biggest marketplace in Latin America, more new businesses
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will want to list new products on it, which means more consumers will want to shop there
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for more purchases AND MercadoLibre can offer their other services to every buyer and seller
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on the marketplace depending on what they know about them. Acquire once, monetize
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everywhere, just like Square's ecosystem. Speaking of which, let's look at their payment
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solutions next.
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Mercado Pago was originally designed to facilitate transactions on MercadoLibre's marketplace
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but now it offers a wide range of payment solutions in a growing number of countries,
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even outside the marketplace. I say this in every Fintech episode I make, but I'll
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say it again here; there will never be a one-size-fits-all global Fintech solution because every country
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has different regulations and infrastructures and cultures surrounding money and commerce.
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That's why I talked about the unbanked world population in the beginning of this episode;
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good Fintech solutions understand and are tailored to the cultures they serve. Mercado
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Pago acts as a payment service provider on platform and off, has a mobile point of sale
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device that attaches to your phone and lets slide a credit card or use its chip, has a
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digital wallet solution with a software development kit, and has a wide variety of financial solutions
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for merchants and consumers. There is also Mercado Credito, which can facilitate
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loans to everyone in the marketplace, as well as provide highly sought-after cash advances
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for merchants. These kinds of payment processing and credit solutions are why I
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think MercadoLibre is a lot closer to Square than Amazon, except tailored for an underbanked
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audience that needs a someone else to provide wide variety of ways to access and transfer
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money.
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If we compare the App ratings of Mercado Pago to some of its peers, we can see the same
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kind of ratings trend. Venmo, which is owned by Paypal, has half a million reviews
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with a 4.3 average out of 5. Square's cash app has half a million reviews with a 4.6
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average. Mercado Pago has well over 2 and a half million reviews and still has a
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4.7 average. The app is far from perfect, but it looks like these services are doing
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a great job, based on Mercado Pago's massive year-over-year growth in total payment volume
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of 72%, or 80% if you're just counting the total number of transactions. Sellers on
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MercadoLibre can opt into Mercado Envios, the network of logistics and shipping partnerships
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MercadoLibre is constantly expanding. Today, over 95% of items sold on MercadoLibre's
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marketplace are shipped with this logistics solution. There are two things to point
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out about Mercado Envios. First, Mercado Libre's solution is a tech integration with
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third party carriers and warehouse services. That means it can add and remove logistics
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solutions from its network as individual nations change laws or develop new infrastructure
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instead of having to manage all of these things themselves. The second thing is that this
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logistics solution stops a company like Amazon from coming in with their own undeniably amazing
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logistics network and undercutting MercadoLibre with benefits like free same day delivery.
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Is it as good as Amazon's logistics? Probably not but is it worse enough to matter? Definitely
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not, which makes Mercado Envios a serious long-term moat. There are a ton of other,
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smaller offerings and opportunities we can talk about, like their advertising service
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and classifieds section for off-marketplace sellers, their expansion into new categories
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like supermarket and groceries, and their expansion into more countries, beyond the
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18 latin American countries they're in today. Comment below or tweet me at ticker symbol
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you if you're interested in me covering those or any other potential growth opportunities
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you see for Mercado Libre. I read all my comments and tweets because I'm always
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interested in what questions people have about these kinds of companies and your feedback
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makes me a better presenter. For now, my opinion as an investor is that we should
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focus on their three biggest business drivers: their online marketplace that scales well
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to merchants of all sizes, their proprietary network of logistics solutions, and their
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wide variety of fintech solutions, including payment processing, point-of-sale solutions,
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credit, and loans — ALL of which provide a great user experience for both buyers and
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sellers.
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The good news is, that's exactly what they covered in their most recent earnings results
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for Quarter 2 of 2021, so let's go over their highlights. The Gross Merchandise Volume
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on the MercadoLibre marketplace grew by 46% year over year. That's huge growth.
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It was up over 100% year over year last quarter, as well as quarter 2 of last year, but both
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of those quarters were during lock downs in Latin America. Just like every digitally-native
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company offering a service online, MercadoLibre's marketplace competes for time with people
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going outside, going to the beach, going out to eat, and all the other things people want
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to do as the world continues to reopen. If we look at Items Sold instead of dollars,
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there's a similar pattern but with slightly lower numbers. When the gross merchandise
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volume is growing faster than the number of items sold, that tells me that buyers are
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trusting MercadoLibre more because they're buying more expensive items on average, which
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only happens once you've tested out the platform and decide its reliable enough to make bigger
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and bigger purchases. In Latin America, trust and reliability are a big deal because
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they're much harder to accomplish logistically. So, buyer trust is up AND seller success is
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up – successful items per seller reached 72 items per seller, increasing significantly
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versus prior quarters. This forms a positive feedback loop because more seller success
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means more new sellers will want to join the marketplace, which means more choices for
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the buyer, which means more purchases, and so on.
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That increase in buyer purchases, seller success, and brand reliability is in part thanks to
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Mercado Envios, which now handles over 83% of all of MercadoLibres shipments, or about
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5 of every 6 items. Every country Mercado Envios is available in is using the service
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more and more. Chile and Colombia are continuing to shift more and more volume to
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the network. 77% of all volume was delivered in less than 48 hours, which is up 28% year
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over year, and they're currently standing up same-day deliveries for some major Latin
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American cities. I think this is a really important thing to keep track of because the
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better their shipping and their overall user experience gets, the harder it becomes to
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disrupt MercadoLibre over the long run. For Mercado Pago, their Fintech solutions,
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is experiencing the same healthy growth as on the marketplace side. Total Payment
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Volume on-platform grew by 72% year over year and number of transactions increased 80% year
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over year. Another thing I'm really liking about Mercado Pago is that off-platform payments
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represent almost 60% of total payment volume, meaning this service has a life of its own
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outside the market place. In a couple years, Mercado Pago could be another serious
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funnel to bring new customers into the MercadoLibre ecosystem instead of them all coming through
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the marketplace, just like Square with Cash App. The Mercado Pago wallet saw total
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payment volume grow by triple digits year over year because people are using it more
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often and for longer when they do. That's great growth.
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There's also great growth on the merchant and consumer credit side; they loaned out
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40% more money quarter over quarter, which is up almost 5X year over year, and are seeing
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exceptionally strong growth in consumer credit thanks to their Buy Now Pay Later features.
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Don't sleep on how important this is. Buy now pay later is becoming a huge differentiator
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around the world, as we know from Square's $29 billion dollar acquisition of Afterpay.
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Just to hammer the point home, Fintech Net Revnues grew to half a billion dollars in
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Quarter 2, which is a 104% increase year over year, after accounting for foreign exchange.
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That $560 million dollars represents almost a third of MercadoLibre's total revenue of
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$1.7 billion dollars for the quarter and I hope to see Fintech represent a bigger and
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bigger chunk of that over time. That 1.7 billion dollars is a 103% year over year increase.
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Gross profits dropped about 4% but that's because MercadoLibre is spending money on
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growing out their first party business and shipping operations network. When Cathie
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Wood says that ARK Invest is looking for their companies to sacrifice profits now to invest
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aggressively in their future growth, this is the kind of line she's talking about.
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Doing this really helps solidify MercadoLibre's lead in a winner-take-most market. What
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we don't want to see is spend on sales and marketing ballooning out of control.
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That's all the context I think you would need to look at the most recent Zacks report for
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MercadoLibre. I really like Zacks reports because they do a great job summarizing the
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business at a high level and always put all the numbers in one place for you. The purpose
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of this episode was to give you the deeper context behind these numbers, so I'll quickly
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walk you through the report and link it for you in the description below, as well. Zacks
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gives MercadoLibre a short-term strong buy recommendation as well as a long-term outperform,
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both of which are the best scores Zacks gives. One thing to point out is that while MercadoLibre
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consistently beats revenue estimates by over 10%, they have had insane surprises on earnings
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per share for 3 quarters now. The last two quarters, they missed on earnings per share
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estimates by anywhere from 1500 and 500 percent respectively and this past quarter, they beat
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those same estimates by the same amount, depending on which estimates you track. Hopefully your
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takeaway from that is that projecting and predicting earnings per share for this company
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is insanely difficult which is why I'm sticking to things we can measure like revenue, market
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penetration, fulfillment rates, and user reviews.
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The rest of this report gives a brief overview of the company and reasons to buy, all of
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which I've covered in this episode, as well as the exact risks you'd expect from a big,
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international e-commerce company that's still in growth mode: reinvesting profits to grow
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different business units, foreign exchange risks in the 18 countries they operate in,
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tough competition from global e-commerce players like Amazon and Aliexpress, and seasonality
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around the holidays. None of those are real risks to me because those all come with the
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entire industry and anyone trying to challenge MercadoLibre will face those same risks. The
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other thing I really like about Zacks reports is they show you comparisons to direct competitors.
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The competitors Zacks selected for MercadoLibre are companies like Amazon and Alibaba, but
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also companies like eBay and Etsy since they allow individual and hobby sellers, not just
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businesses. If we look at why they gave it an F for value, it's because it's trading
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at over 5 times the enterprise value to earnings ratio that Amazon is, and almost 4 times the
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price to sales. That's pretty expensive, so definitely not a value stock. It also has
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much more debt relative to its assets and the money it brings in, which is pretty typical
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of a company in growth mode. And MercadoLibre is definitely in growth mode, with a 75% sales
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growth projection, compared to Amazons roughly 25%. So these two companies really are just
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in different parts of their lifecycle.
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Hopefully, this deep dive helped you understand what MercadoLibre does in the context of the
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Latin American markets they operate in, which parts of their business they'rereinvesting
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in to keep growing exponentially in the future, and how MercadoLibre is actually as close
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to Paypal and eBay as it is to Amazon, thanks to its rapidly growing Fintech ecosystem.
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Because it's also got this extra tailwind of increasing internet users in Latin America,
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MercadoLibre is probably going to have a top-10 spot in the $100,000 dollar portfolio I'm
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starting when Ticker Symbol YOU hits 100,000 subscribers. I'm building that portfolio from
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scratch to compete directly with ARKK, ARK Invest's flagship innovation fund, over the
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next 5 years, or as long as it takes for me to admit defeat. If you're interested in jumping
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on that wild ride, consider liking this video and subscribing to the channel with all notifications
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turned on. That way, you'll be the first to know when I come out with more deep dives
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like this one as well as exactly what I'm putting in that portfolio over time. I think
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it's going to be a lot of fun.
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Thanks for watching and until next time, this is ticker symbol you, my name is Alex, reminding
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you that the best investment you can make… is in you.