Huge Free Market Potential
Danny is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This is one in a series of ongoing articles detailing why I invest in various companies. I focus primarily on non-financial intangibles that point toward the possibility of multi-bagger potential.
What they do:
Mercadolibre (NASDAQ: MELI), which means “free market” in Spanish, is often referred to as the eBay (NASDAQ: EBAY) of Latin America. The similarity between some of the services offered by each are striking: Each offers online auctions and a secure online payment service – PayPal for eBay and Mercado Pago for Mercadolibre. One might think that Mercadolibre is copying eBay’s model for success or that eBay might want to compete in this market. However, if you go to Mercadolibre’s homepage and click on the US link, it will take you directly to eBay! While they may have started out as competitors, after failing to make significant gains in Latin America on their own, eBay bought an 18% stake in Mercadolibre. Since eBay has a vested interest in Mercadolibre succeeding, they now act as a mentor. In this way, Mercadolibre can benefit from eBay’s experience – without making some of their mistakes. The one greatest example of this is Mercado Pago – Mercadolibre’s version of PayPal – which is one of the most successful and highest growth areas in eBay’s toolbox.
If this were all there was to the story, then this still might provide a compelling investment opportunity. However, Mercadolibre has much more fertilizer in their growth arsenal. In addition to the online auctions and Mercado Pago, they offer retail sales like Amazon.com, real estate listings like your local MLS, and classified ads like Craigslist. They have consistently added additional revenue streams, increased transaction volumes, improved their user platform, and increased their user count.
Why invest in Internet Growth?
I see one of the main reasons to invest in Mercadolibre as the same reason I invest in Baidu (NASDAQ: BIDU) – China’s most popular internet search portal – internet penetration. In the case of Baidu, internet growth will continue to be a significant driver of revenue. As of 2011, estimates put Chinese internet penetration at just over 38% of the population (of the 1.347B population). In terms of sheer numbers, China still has an untapped pool of users larger than the population of the United States. I posted more of my Baidu thesis here:
Meanwhile, back in Latin America, as of December 2011, estimates put Latin American internet penetration at just under 37% of their 579M population. Here in the US, internet penetration is more than double that at 78% of our 313M population. In terms of sheer numbers, Latin America also has an untapped pool of users larger than the population of the United States. Some of the population of Latin America does not have the disposable income of their American counterparts and the total internet penetration may not be comparable for some time to come, but that still leaves us with a huge consumer pool to draw from.
Brazil provides a large percentage of Mercadolibre 's revenue – more than half in the most recent quarter, but it also provides some of the greatest opportunity - due to their emerging middle class. Brazil has the highest population of any country in South America - with 4 1/2 times the population of Columbia and Chile. Brazil also has one of the fastest-growing economies and one of the fastest-rising rates of internet adoption.
As more and more Latin American users gain access to the internet, more will migrate to the most popular internet past times: videos of cats, Facebook and Twitter and online shopping. Mercadolibre is in the best position to capitalize on this migration. The combination of the emerging middle class and internet penetration provides a huge, as yet untapped market for Mercadolibre.
Mercadolibre has one quirk which seems to confound investors – they report in dollars. This adds the specter of exchange rates to the results. Most recently, Mercadolibre reported revenue growth of 39%. However, had these results been viewed in terms of local currencies, they would have shown revenue growth of 47%. This can be a double edged sword. In the most recent quarter, Mercadolibre missed on analysts estimates (Mercadolibre doesn’t provide guidance) and promptly fell 7% in after-hours trading, then ended up the day slightly higher. In the previous quarter, Mercadolibre reported results that beat estimates, and ended up 31% on the day. In both cases, foreign currency exchange rates – changing from local currencies to dollars for reporting – had a material impact on the results.
As with any investment there are risks. The risk of nationalization, popular civil unrest or recession in any of their core areas could cause a significant pullback. Additionally, there is increasing competition in their backyard by local competitors as well as Amazon.com. A quarter that does not produce double-digit growth could have investors putting Mercadolibre on the auction block.
One analyst, however, best articulates why I believe that Mercadolibre is a great investment going forward:
In a report, Bartley said "e-commerce in Latin America should continue to grow roughly 20% for several years." Drivers include increased Internet adoption, growth in online shoppers and a shift by brick-and-mortar retailers to the Internet. Less than 2% of retail products are currently available online, he wrote.
In addition, he said, "Mercadolibre should benefit from several company-specific growth drivers."
This includes website improvements that might drive the addition of large retailers.
"The growth outlook for the Internet and e-commerce in Latin America remains very strong and Mercadolibre should benefit disproportionately," he wrote.
All this adds up to strong growth opportunities for Mercadolibre and saavy investors.
dvena is long MELI and BIDU. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.