MercadoLibre - Tech Bubble Time Capsule

| About: MercadoLibre, Inc. (MELI)

Summary

MercadoLibre emulates established American e-commerce business models.

It holds a market leading position in Argentina, Brazil, Chile, Colombia, Mexico, Uruguay, and various other Latin American countries.

Registered users have grown between 20% and 37% per year since 2006.

Items sold on its platform have increased 22% to 40% annually since 2006.

Internet penetration and e-commerce acceptance are in their early stages in Latin America.

Time Capsule

Imagine a trip back in time to the beginning days of the internet and the sky-high valuations of tech companies and infrastructure companies that supported them. Investors abandoned traditional valuation metrics and carelessly bid up prices of any stock with a .com, .net, e-commerce, or similar description attached to its name.

From their 2000 highs just over a year earlier, Yahoo! (YHOO) lost 96% of its value, Cisco Systems (NASDAQ:CSCO) declined 87%. And these are just a couple of examples from the speculative internet bubble of the late 1990s. Investors rightly recognized the enormous business potential presented by the internet. However, they wrongly pursued any investment even slightly related to the new technology.

Fast forward fifteen years and only now do investors know that Amazon.com (NASDAQ:AMZN), e-Bay (NASDAQ:EBAY), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and Priceline (NASDAQ:PCLN) are among the big winners of the information age. Although this knowledge was subsequently acquired, it isn't without a useful application. Emerging markets of the present day are going through a similar transformation as was the U.S. at the turn of the century.

The Free Market

And that's where MercadoLibre (NASDAQ:MELI) steps in. MercadoLibre, Spanish for free market, is a potential e-commerce stalwart in the making. The company has built the largest e-commerce platform in Latin America, and is a leader in Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Uruguay, Venezuela, and other countries. The company draws comparisons to Amazon.com for its active marketplace, and to PayPal (NASDAQ:PYPL) for its MercadoPago payments service. And another U.S. e-commerce heavyweight has taken notice as well. e-Bay terminated its operations in MercadoLibre's Brazilian market in 2001 and acquired an 18% ownership interest in the company.

The Virtuous Cycle

Amidst the fury of the stock market bubble in 1999, CEO Marcos Galperin began drafting the business plan for his new company while at Stanford University. And he must have been taking careful notes, because even at that time, he could already tell what the most successful internet business model was likely to be. Galperin founded MercadoLibre in 1999. His top two executives have also been with the company since that year.

Since founding the company sixteen years ago, Galperin and his team have been busy building the best e-commerce infrastructure in Latin America. The MercadoLibre marketplace brings buyers and sellers together, MercadoPago payments solution facilitates payments from buyers to sellers, and MercadoEnvios shipping service integrates with logistics and shipping carriers. Each service is promoted for cross-usage across the website, and together they represent an integrated suite designed to reduce transactional friction and facilitate higher volumes of activity among marketplace participants.

And the company's efforts have paid off in a big way. At year-end 2015, MercadoLibre boasted 145 million registered users, a number that has grown between 20% and 37% each year since 2006. The number of items sold on the platform has increased from 21% to 40% each year over the same time frame.

MELI Registered Users Source: MercadoLibre 10-K Annual Reports

MELI Items Sold Source: MercadoLibre 10-K Annual Reports

What's most exciting, though, is the future potential. Morningstar estimates that there are approximately 325 million internet users out of a population of 600 million in Latin America. The penetration rate of ~50% is trailing far behind developed economies; the U.S. rate stands at 80%. MercadoLibre currently has over one-third of internet users registered on its platform - a number that is growing at a rapid rate. Continued growth in its registered users coupled with growth in overall internet usage in Latin America places what could potentially be decades-long economic tailwinds firmly at the back of MercadoLibre.

The thesis is that over time, all buyers and sellers will migrate onto MercadoLibre's platform. Otherwise, buyers won't be able to find the products they're seeking and sellers won't be able to compete because they're not reaching a large enough customer base. New local competitors trying to challenge this dominance will find it difficult to do so, because it takes substantial resources and time to create such a robust platform. And the competitive advantage will only strengthen over time as the gap between MercadoLibre and its competitors gradually becomes wider and wider.

This phenomenon creates a virtuous cycle for the company, as user growth encourages more sellers to join the platform, and as more sellers join the platform even more users will then join. The process circles back and forth repetitively at a time when the overall market begins to experience a gradual cultural shift towards embracing e-commerce over physical retail and a larger percentage of transactions move from bricks and mortar to online. Both trends favor MercadoLibre to become a dominant force in its industry.

The entire story of MercadoLibre hearkens back to the glory days of the internet, and the opportunity investors had at that time to invest in stocks like Amazon.com and e-Bay while they were still in their infancy. Many commentators note how MercadoLibre combines the best aspects of Amazon.com, e-Bay, and PayPal all in a single company. And the endless potential it promises may well represent an opportunity to benefit from those companies' success long after the fact.

A Word About Risk

I personally consider MercadoLibre to be the most compelling growth story available in the market right now. But there are substantial risks that could derail or diminish the promising potential of the company. First, the American e-commerce giants to which the company draws its comparisons began their businesses in a world where there was no clear established competition. Every e-commerce competitor was a newly formed company trying to establish itself for the first time. MercadoLibre faces the risk that these established competitors encroach on its territory and steal its market share.

Second, the company reports in U.S. Dollars, but conducts business in various currencies. If $1 was worth 2 units of a foreign currency at the beginning of a period but appreciated to be worth 2.2 units at the end, revenue growth of 30% in the foreign currency would equate to just 18% growth in USD after translation. More specifically, MELI grew total revenue 80% in local currencies in 2014, but that translated to just 17% in USD. Currency devaluation poses a risk for U.S.-based investors whose dividends and investment returns will be measured in dollars.

Supporting Documents

  1. AMZN__EBAY__MELI.xlsx

Disclosure: I am/we are long MELI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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