Sjuggerud’s “Next Tencent”

What's being hinted at as the latest "ecosystem" stock recommendation from True Wealth?

By Travis Johnson, Stock Gumshoe, February 5, 2018

I’ve had a couple readers ask about this one, and it seems fairly interesting, so I thought I’d look into it even though it doesn’t seem to have been particularly actively promoted.

The “tease” came in Steve Sjuggerud’s free Daily Wealth newsletter over the weekend, as bait to tempt subscribers into his True Wealth newsletter ($199/yr), and it’s a bit of a follow-on to his oft-promoted recommendation of Tencent, which has been hugely successful (he’s been behind that one for at least a year and a half or so, which means the stock has more than doubled).

And it gets that “next Tencent” moniker, apparently, because this is also an “ecosystem” stock — a company that he thinks controls a platform that benefits dramatically from the network effect. Here’s a bit from Sjuggerud:

“The crazy thing about these ecosystem-based businesses is that the customer doesn’t want to leave them. Everyone else is using them, too. You don’t want to force your friends to call you or message you on another app.

“With these ecosystems, it’s a winner-take-all type of thing… It doesn’t matter who the No. 2 to Facebook is. The market leader is the only one that matters.”

So what’s this “ecosystem” stock he likes now? These are the clues:

“Steve says the “next Tencent” has created a similar digital ecosystem…

“Again, this company isn’t based in China. And it’s certainly not a U.S. firm.”

Sheesh, that doesn’t narrow it down very much. Anything else?

We’re told that “it is the largest and most dominant e-commerce company in more than a dozen different developing countries.” And that Sjuggerud says the business has been adding “additional ‘ecosystems'” lately, whatever that means… perhaps they’re building social or payment or communication platforms on top of the e-commerce.

Anything else? It’s growing…

“Revenues grew more than 60% in the most recent quarter, meaning that it’s growing even faster than Tencent and Alibaba…”

And he says that the company’s market cap is “just $15 billion” … so who is it?

Well, I got the Thinkolator all fired up after brushing off the ice this morning and filling the tank, though it took a few kicks and some swearing. The answer came out right quick once we got her humming, though, so Sjuggerud, sez the Thinkolator, is almost certainly teasing the e-commerce giant MercadoLibre (MELI).

MercadoLibre has had a heckuva ride, rising more than 50% just since October as part of what Sjuggerud has been calling the “melt up” in the market for growth and technology stocks. They have been a favorite of many newsletter pundits over the years, the emerging markets letter at Cabot has pushed MELI several times, and it has reportedly been a re-recommended favorite of David Gardner at the Motley Fool for many years as well.

And yes, MELI did post 60% growth in revenue last quarter, continuing a good string of growth in the past few quarters after several years of much slower growth rates that were more often in the 15-40% range. They operate the leading e-commerce platform in Latin America, with core strength in Mexico and Brazil but also strong growth in slightly smaller markets like Columbia and Chile. Here’s how they describe themselves:

“MercadoLibre hosts the largest online commerce and payments ecosystem in Latin America. Our efforts are centered on enabling e-commerce and digital and mobile payments on behalf of our customers by delivering a suite of technology solutions across the complete value chain of commerce. We are present in 18 countries including: Argentina, Brazil, Mexico, Colombia, Chile, Venezuela and Peru. Based on unique visitors and page views we are market leaders in each of the major countries were we are present.

“Through our online commerce platform and related services, we provide our users with robust online commerce and payments tools that not only contribute to the development of a large and growing ecommerce community in Latin America (a region with a population of over 605 million people and one of the fastest-growing Internet penetration rates in the world), but also foster entrepreneurship and social mobility. Our main focus is to deliver compelling technological and commercial solutions that address the distinctive cultural and geographic challenges of operating an online commerce and payments platform in Latin America.”

That “other ecosystems” reference presumably refers to the payments (Mercado Pago) and shipping services (Mercado Envios) that MercadoLibre has been building, and they have, like Amazon, been reinvesting pretty heavily into building the infrastructure to support stronger customer service around what started as a very ebay-like “marketplace” operation. They’ve particularly been investing in free shipping initiatives in Brazil and Mexico, where Amazon is a more meaningful possible competitor, and that has pressured their margins in recent quarters — but the top-line growth has been keeping investors happy, and that’s not really new (earnings growth has rarely kept up with revenue growth at MercadoLibre, thanks to the persistent focus on reinvesting in growth).

The fear for MercadoLibre, as for most other e-commerce operators outside of China, is that one day Amazon will begin to focus on taking share South of the Border and that will dramatically ramp up the competitive pressure on MercadoLibre. Which is certainly possible, and it’s never a good idea to ignore the competitive threat that Jeff Bezos could conjure up with a single word, though Amazon has been in Mexico for several years, including the launch of Amazon Prime in Mexico about a year ago, and MercadoLibre has continued to grow in that country… Amazon doesn’t automatically get to “win” every market it enters.

MercadoLibre has generally been more of a service provider than a retailer — more like Alibaba or eBay and less like Amazon or JD.com, in that they haven’t actually owned warehouses full of goods and sold them but have instead facilitated transactions — and that keeps margins pretty high… but that is pretty clearly shifting now, with their increases in spending as they try to make sure they secure market share in these growing markets, because the gross margin has dropped from close to 80% a decade ago to 47% last quarter, with most of that bump down happening in just the past couple years.

So that increases the risk that MELI won’t be a profit growth story in the near future, but it does likely mean that they’re giving themselves a good chance of continuing their revenue growth — and that seems to be what investors want right now, at least from companies who are mentioned in the same breath as Amazon and Alibaba. That increases the risk of a jolt downward in the near term, since there’s no foundation of profits that investors can look to if they get worried about the top line growth, so it might be that more nimble investors will do better with MELI if they look for dips in the share price when sentiment has a hiccup — but certainly they have a strong market presence in some fast-growing economies to our South (and clear leadership, in most of those places), so they have a very good “first mover” advantage and brand name that should give them some ability to fight off incursions from the larger international e-commerce companies… assuming that fight ever comes.

Currency fluctuation is also often a big deal for MercadoLibre, since they report in dollars but earn essentially all of their money in other currencies — the weakness of the dollar may provide them with a bit of a growth tailwind if the US$ continues to generally weaken, though the Brazilian Real and Mexican Peso and Colombian Peso have not necessarily been all that much stronger than the US$, and some South American currencies have been quite weak (Argentina’s intentional peso devaluation, the failed state of Venezuela, etc.), offsetting relative strength in Chile and Peru. It’s a constantly evolving web, so that brings some additional unpredictability to MercadoLibre’s results.

And, of course, the “what if Amazon goes big into Brazil” talk always leaves open the possibility that MercadoLibre could become a takeover target — if Amazon or Alibaba or even a smaller player like JD.com wanted to expand into 18 new countries with one fell swoop, they could easily afford to pay a premium price for the relatively small ($16 billion market cap)
MercadoLibre. I’ve never heard any indication that any company is actually interested, but it’s a persistent investor daydream and it’s certainly not impossible. eBay was a major investor in MercadoLibre for years, but they sold down the vast majority of their holdings and their stake is now relatively small.

There’s not much of a fundamental argument to be made for MELI based on the usual things like earnings or dividends, and it’s even expected that the profit margins will continue to fall for the next couple years as they spend more to grow, so they will presumably continue to be valued as a revenue growth and market share growth story… and the analysts are still pretty optimistic on that front, expecting revenue to grow by close to 50% a year for the next couple years.

And with that, I’ll leave you to make your own call — it’s hard to imagine another homegrown e-commerce company taking a chunk out of MercadoLibre in any of its core markets, and they will certainly be subject to the rise and fall of the currencies and economies of the larger countries where they operate… but they are still relatively small in the context of the world’s other international e-commerce giants, and being smaller does make growth a little easier to come by. I’ve not owned this one (unfortunately, given the strong recent performance), but I’d welcome your thoughts on their future… just use the friendly little comment box below.

P.S. We’re continuing to collect reader opinions about the newsletters they’ve subscribed to — so if you’ve ever subscribed to Sjuggerud’s True Wealth, please click here to let your fellow readers know what you thought. Thank you!

Disclosure: I own shares of Amazon, and call options on both Alibaba and JD.com. I do not own any other stock mentioned above, and will not trade in any covered investment for at least three days per Stock Gumshoe’s trading rules.


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40 Comments on "Sjuggerud’s “Next Tencent”"

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vivian lewis
Guest
0

we already recommend MELI and of course our readers pay much less than Daily Wealth subscribers do. http://www.global-investing.com

hedy1234
Irregular
1408

Vivian. This is not the place for selling your subscriptions………

Mister
Guest
0

This Vivian is a leech on Travis who is doing the community a service and she is trying to leech off it by selling subscriptions. Shame on her.

Mister
Guest
0

Yeah. Gumshoe readers pay Zilch, Zero, Nada..with the exception of a way better irregular service than your so called investing service..

JayBee
Guest
0

Vivian,

You say that your readers pay much less than Daily Wealth subscribers do. How is that possible? Daily Wealth subscribers pay nothing — it’s free.

Chuck
Guest
0

I BABA or AMZN began buying MELI, it could touch off a buying frenzy as they might compete for control. Meli’s price could explode. Of course, either could do so secretly, through third parties. Any sudden increase in volume might indicate this is happening.

Mark
Guest
0

meli is correct!

B.D.
Guest
0
I’ve subscribed to Stansberry products for about eleven years. They made me far more than they’re cost and were spot on navigating the Great Recession, which is not finished in terms of aftermath. They come with a lot of ad hype, particularly from Porter S. But they are one of the most accurate services I have used if you’re a patient long term investor and pay attention to the tenets they want you o learn, like paying attention to your ‘stops.’ They don’t expect you to take their word for it, aren’t always right and don’t intend to be first… Read more »
elk82070
Irregular
40

This is consistent with a January 31 article by Richard Robinson called IT’S THE PERFECT TIME TO BUY THE AMAZON OF LATIN AMERICA. I hope that this is OK to say. I am a new Irregular and still learning the ropes.

chazman7
Member
4

Are u sure this is not Naspers?

E G
Guest
0

Echo B. D.’s comments re: Stansberry Research products, including Sjuggerud’s True Wealth – he nailed it on TenCent. Like B.D. I have done well with Stansberry and it has become my primary newsletter source – slowly letting others lapse.

Larry
Guest
0
I have been a long time subscriber to Stansberry Research. I know others have paid them compliments in this discussion. I would just add that if you want to try a fundamental service, that does have high-end products, you would do well with Stansberry. Are they perfect? No, but you can ‘learn’ if you wish to do so. Steve Sjuggerud is a PhD, who wrote his doctoral thesis about currencies…the man is no slouch. Porter is the promoter for sure, but how else would he stay in business? I remind myself of that sometimes when I think I am getting… Read more »
summersalt
Irregular
21

I have also subscribed to Stansberry products for many years. I’m now an
Alliance member that entitles me to all their publications but two. I have done very well with most of their recommendations.

JayBee
Guest
0
I subscribe to a few of the Stansberry newsletters, including Retirement Millionaire and True Wealth. The different editors give a lot of good recommendations, but I get the most value from reading Porter Stansberry’s daily S & A Digest, which comes free to anyone with a paid subscription to any of the Stansberry newsletters. Porter talks about a lot of different things in the S & A Digest, and he frequently plugs his firm’s many newsletters, but every once in awhile he throws in a free recommendation with no strings attached. I’m not sure if he does this consciously or… Read more »
JayBee
Guest
0

Correction: Porter’s daily newsletter is called The Stansberry Digest, not the S & A Digest. Not sure why I wrote the incorrect name. Maybe that was the original name.

Either way, Porter mentioned last Friday that Stansberry Research is looking forward to a public offering of their company’s stock in the near future. That won’t be free, but it might be his best recommendation ever.

sheldon
Irregular
236

Avoid uaa as per stansberry

mary
Irregular
779

Travis….with the recent drop in in the market, are there any stocks you find particularly appealing?

moneysap
Irregular
4

I am a little surprised to see all this applause for Stansberry. I got involved (stupidly) when they used Ron Paul to say the sky was falling and look for the government to confiscate your assets. I will not belabor their other shenanigans. I got out in time for the guaranteed refund but had to be quite persistent to connect for that refund- not simple, but achieved.

Leo
Guest
0

You’re right. It is MELI.

Martin
Irregular
59

Mary

Last week I looked at a new EFT called the Green Market Report and bought most of the 30 stocks listed in the EFT. These stocks are mostly pink sheet and all the companies are in the hemp marijuana business. I actually had an increase in value of 4.2% while the overall market dropped 1150 points

socr
Guest
0

Sjuggerud’s true wealth is ok for it’s price tag, and one shouldn’t pay more for any other stock advisement letters ,my experiance is the more you pay the poorer the outcome, most of these are pump and dumps.
Sjuggerud made also big mistakes with Yukos and Icelandic bonds in the past so after the huge run up for MELI ,I’m not interested in this stock .Naspers is ok but thrived only huge because of the massive fiat money bubble also happening in China and waiting to hit a pin, maybe he’s right about the melt up thesis we will see

2168216821
Irregular
22

Renevia The closest major commercial product to gaining approval for BTX (was supposed to reveal updated data February 3 at a conference but it is not posted on BTX website which is normally comprehensive-although they had released data which was quite positive recently

2168216821
Irregular
22

I am not bashing any particular newsletter or stock picker when I say that please renember that we had a generational bull market from basically March 2009 till now-so matter what investments anyone recommended -should have done very well on a net basis & definitely imo are no indication of how these folks will perform going forward if folks who offered their picks did not do exceptionally well during this time period that would be sad-& that goes for biotech as well

orphan brigade
Member
4

That looks like a great company but at that price ? Gee….Whiz.

Dave H
Guest
0

yes your right. it is MELI, but has dropped recently.

bludolphint
Irregular
112
I am a lifetime subscriber to True Wealth, it only costs me $29/year. I wont add much but just wanted to congratulate you Travis & the thinkolater for another perfect stock case solved. I have always liked Steve Sjuggerud, as he has given some pretty good picks over the years and he is more into ETF’s now in True Wealth which I am trying to use a bit with options. His newsletter is the only one I subscribe to now, and the reason is that THE ONLY ONE I NEED IS STOCK GUMSHOE! This is the only publication I need… Read more »
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