MercadoLibre has been a grand slam holding for its long-term investors
a ten thousand dollar investment in this company at its ipo is currently worth more
than three hundred and fifty thousand dollars but MercadoLibre stock is currently down more
than fifty percent from its recent high here's why we think that right now is a great time
to open up a position in MercadoLibre my name is brian Feroldi and my name is brian Stoffel
thanks to commonstock for sponsoring today's video as of the time it's recording both brian
and i own MercadoLibre stock brian mercadolibre is roughly a $50 billion dollar company today
mercadolibre's mission statement is to democratize commerce and finance in latin america this is
simple inspirational and optional i love it i love that mission statement too but how do they
do it well the company started out with an online marketplace to buy and sell goods mercado libre
then they created a payment solution mercado pago from there they moved on to logistics with mercado
envios and now they have a credit solution which is mercado credito yeah there's a lot going on
under the hood so here's a quick review of the business segments that this company has first is
their marketplace which as brian said is kind of like the ebay of latin america second is mercado
envios which is their fulfillment network which is kind of like fulfillment by amazon those two
businesses currently account for about two-thirds of revenue next is their payment solution business
which facilitates transactions between businesses and consumers and then fourth is their financing
division which makes things like loans to small businesses the payment solution business and the
financing business are about one-third of total revenue now it's worth going over how all these
segments are doing this first one shows mercado libre's gross merchandise volume over the past
two years and as you can see it is growing at a rapid pace another key metric to watch is
items shipped via mercado envios which is the company's fulfillment network last year
the company did almost a billion packages shipped and the growth here has been exponential mercado
pago which has really taken over as the growth engine is incredible if you look here that red
area that's the amount of money changing hands using mercato libre's website but the yellow
area is where people are using mercado pago for things that have nothing to do with mercado libre
like paying for gas or groceries this is quickly becoming the de facto digital payment option in
latin america lastly the company's credit division mercado credito is also seeing a huge uptick in
sales to customers now even though the company is well known in latin america it is spending
aggressively in sales and marketing right now it eats up about 50% percent of gross profit overall
we think that customer demand for these companies product lines is very strong and relatively
recession proof however in a prolonged downturn we would expect downward pressure on the company's
top line and finally given the dynamics of all four of those business segments we mentioned the
vast majority of this revenue is recurring turning to moat we think that mercado libre has built an
enviable one primary way that protects itself is through the network effect the more buyers
that join his platform the more that attracts sellers and the verse is also true since mercado
libre has emerged as the top dog in the space we think that the network effect is very powerful
but we also think that switching costs are very high we need to remember that mercado pago
is usually the first digital payment option that many of these users have ever had because mercado
libre is focused on the underbanked once they get them in the system they are load to switch to a
different digital payment option there's also an argument to me that the company has low cost
production through its mercado envious product when compared to its competitors such as amazon
the company has spent aggressively over the last few years to build this out and it's going to
continue doing so we think that provides it with a durable competitive advantage you could also make
an argument that the brand value is very high if someone wants to buy something or needs to
adopt a digital payment solution mercado libre and mercado pago are household names finally we also
think that you could make the argument that they have counter positioning on the mercado pago side
versus traditional banks as brian mentioned before a huge swath of the latin american population is
unbanked and ricotta pogo is the first bank that they choose that is something that differentiates
them from the competition and they would have a hard time matching it however we don't think
that that advantage is very strong that said if you put all of these factors together this is an
extremely widemop business and its moat is expanding turning to the company's financials this
has been a top-line growth story for many years and the top line growth has been huge in the last
three years growing at a 75 percent rate which is just incredible given this company's scale
turning to gross margin over the last year it came in at 40 this isn't the strongest but you'll see
this number bounce around a lot depending upon where the revenue is coming from and how much the
company is spending on its newer products turning to net income this figure also bounces around a
lot over the last year it has been profitable on a net income basis before that it was unprofitable
however given the stage this company is in we don't think that net income is the best way to
judge this company's profitability free cash flow can also bounce around quite a bit one of the
reasons that it boom so much in 2020 is because business accelerated and the company couldn't
keep up its spending plans to match with it that said the important thing to note here is that it
is bringing in not losing cash on a consistent basis the company's balance sheet is in good but
not great shape it has 2.8 billion dollars in cash and about 2.2 billion dollars in debt that gives
it plenty of financial flexibility to execute its growth plan overall returns on capital are
low but that's to be expected given where mercado libre is in its growth story turning to management
marcos galperin is the founder and ceo since starting this business more than 20 years ago
he has been at the helm and driving this company's success the entire way up with over 3 000 reviews
on glassdoor.com employees give the company four and a half out of five stars and galperin
also earns great marks meanwhile insiders here own about eight percent of the business which
is currently worth about four billion dollars at current prices the majority of that is through
ceo and founder galbrain but that does give us confidence that management does have some serious
skin in the game in terms of optionality mercado libre is in rare company this company has rolled
out so many new products and we've covered the four core ones but it has new irons in the fire
as well like a business to business solution and advertising mercado libre is currently focused on
growing its top line and not on its bottom line for that reason we think that there's a lot of
pent-up operating leverage in this business once it chooses to focus on profitability so how big
is that opportunity well you should take this number with a grain of salt but when you add all
the pieces together it could be worth around one trillion dollars of which the company has captured
less than one percent meanwhile mercado libre has accomplished all this without having to
lean on acquisitions so the vast majority of its revenue growth has been organic in nature
but how has mercado libre been as an investment despite falling recently it has been a 35 bagger
since coming public and it has smashed the s p 500 over the last five years the company has a mixed
track record with meeting wall street's estimates and has missed in two of the last four quarters
and given the spending it is doing right now to chase that opportunity the company is not focused
on returning cash to shareholders sounds good so far right well let's turn to risks so there
are a bunch to keep in mind first and foremost is competition mercado libre has to worry about
local competitors in brazil such as pog saguro and stoneco it also has to worry about big e-commerce
players such as amazon and more recently sea limited has taken a shine to latin america
and is trying to encroach on the company's turf so far the competition has not dented mercado
libre's growth but there's no guarantee that that will mean the case moving forward second there's
a lot of moving pieces here and if you don't know where to look or what to watch out for
it can be difficult to understand the company's financials third there are several geopolitical
risks that are worth mentioning here a few years ago the company was operating in venezuela but
has since had to pull out of that country moreover because the company gets the majority its revenue
from brazil argentina and mexico inflation and economic uncertainty are going to be constant
things for investors to monitor now closely tied to that there are outside forces that can
affect results as well the main one being foreign currency exchange rates which can be a real drag
on the company's results and finally even though this stock has fallen hugely from its 52-week high
in no world is this company considered cheap today shares are currently trading for about
seven times sales that's a high number in absolute terms although when viewed historically over the
last 10 years it's towards the bottom end of its range on a price to free cash flow ratio
the company is currently trading at 138 times that makes sense given that this company is spending
hugely on capital expenditures so this isn't the best metric to judge the company's value now why
is it trading so expensive look how this company's revenue has grown over the last 10 years and how
this company's gross profit has grown over the last 10 years it's clear to us that investors
are expecting continued high growth for many years to come so now that we've announced that
we'll be making a purchase of mercato libre for our portfolio what are we going to watch well
the first thing is free cash flow now we don't expect it to be going consistently up and to the
right but we want to see it working that way over time this can be lumpy but it needs to be positive
second keep an eye on total payment volume we want to see this number continue to scream higher it
gives us a sense that it's mercado pogo fintech solution continues to catch on with its consumers
and finally to make sure that that core marketplace business is doing well we're going
to follow gross merchandise volume or the value of all the stuff trading hands via their website
so how do mercado libre score on our investing checklist the answer there is great on mine it got
a 78 which was well into my investable category and the entire reason that i chose this as our
investment for the week is because a score of a 15 is the highest a company has ever gotten it
broke my scale i consider this a very anti-fragile company so there you have it in the next couple of
days we'll be making our third purchase in our new real money portfolio if you want to follow along
you can do so by following us on common stock and there's a link in the video description to do so
also we wanted to let you know that common stock has agreed to make a $250
cash payment to whoever makes the most insightful comment on the slides that we
share about this video do you have constructive criticism for us do you have more information to
share about marcotte libre is there something that you think we're overlooking let us know
by commenting in the post that we do in common stock about this video and you could win $250
in cash the winner will be chosen and announced one week after this video goes live brian's out