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