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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