The Best Things in Life Aren't Free
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’ve been spending some time recently digging a little deeper into three Latin American focused companies with business models we all know well here in the states. I am looking to add a bit more spice to my portfolio that I’ve filled with inexpensive dividend paying stocks as I like to reinvest those dividends into those companies with spicier growth. The final company on my watch list is MercadoLibre (NASDAQ: MELI).
MercadoLibre, or "Free Market" in English, is an e-commerce company that is known as the eBay (NASDAQ: EBAY) of Latin America for good reason. Like eBay, they operate both auctions and fixed-price marketplaces and have a payment system comparable to PayPal called MercadoPago. The similarities shouldn’t surprise anyone -- instead of competing directly with eBay, they work together as partners after eBay traded their Brazilian subsidiary for an 18% stake in MELI over a decade ago. MELI operates in over a dozen LatAm countries with strong presences in Brazil, Mexico and Argentina. With over 500 million potential customers MELI has a lot of room to grow.
In a presentation given at last year’s analyst day, Mercado said that they had 22% of the market share of Latin America e-commerce platforms with an estimated 33 million unique visitors giving them the number one position in the region. To put that number into perspective, Amazon (NASDAQ: AMZN) had about 12 million unique visitors in LatAm over that same timeframe. When you look worldwide Amazon held the top spot with 282 million unique visitors, followed by eBay with 223 million and Mercado taking an eighth place finish worldwide. What makes these numbers really exciting is the fact that internet use in LatAm is at less than 40% of the population vs. nearly 80% here in the US. As more consumers in LatAm join the ranks of the middle class it will push internet penetration higher and more visitors to MELI.
MELI has been growing earnings at a pretty fast clip and projects to continue to grow them by 30% in each of the next two years. Still, there is nothing cheap about the stock. At just shy of $4 billion in market cap, they are trading at more than 50 times earnings. The best things in life are hardly ever free and they typically aren't cheap either. MELI is one of the best opportunities to profit from the growing trends of LatAm consumers joining the middle class and then spending their extra disposable income online. MELI has a lot of room to grow in both marketplace and payments and if eBay is any example they have ten-bagger potential.
I have a bit of a history with MELI as I owned the stock for a near triple and then not only sold all my share but went short the stock as I had concerns that they were playing some accounting games in their Pago division. My concerns turned out to be a non-issue and I closed the short at a minor loss. I’d really like to start to build back a position in MELI, but I have a mental hang up having missed the last $20 of upside in the shares. I’d really like to buy a very small position just to get past my mental block, but when I look at the other two LatAm stocks on my watch list both are cheaper and have more of a defined path to growth, making either an easier choice. I plan to keep watching MercadoLibre and if shares fall below $70 I’d consider opening a position.
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