MercadoLibre

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

MecardoLibre is the leading e-commerce and digital payment ecosystem in Latin America, enabling both buying and selling in the region.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

MercadoLibre (MELI) is a technology company that operates primarily as an e-commerce and digital payment platform in Latin America. Its operations can be segmented into:

  • Marketplace: This segment is the core of MELI’s business, where users can buy and sell products, ranging from consumer electronics to apparel and groceries, on the company’s website and mobile app.
  • Fintech (Mercado Pago): This segment offers a suite of fintech solutions, such as payments processing, lending, and digital wallets. It allows users to transact both on and off the MELI marketplace.
  • Logistics: Mercado Envios, the company’s logistics arm, provides end-to-end logistics for buyers and sellers, including warehousing and shipping.
  • Credit: Mercado Credito, a credit marketplace that facilitates access to credit for both consumers and merchants through MELI’s platform.

MercadoLibre operates across 18 countries in Latin America, including Argentina, Brazil, Mexico, Chile, Colombia, Peru, Uruguay, and Venezuela.

Revenue Streams:

MercadoLibre’s diverse revenue streams enable it to tap into various aspects of e-commerce and fintech in Latin America. Their latest financials show the following distribution of net revenue:

  • Commerce: includes revenues from sales commissions, listing fees, shipping, and advertising on the marketplace platform.
  • Fintech: primarily consists of revenues from merchant payment processing, credit card services, and insurance sales.
  • Other: this includes revenues from non-core activities.

The e-commerce and fintech markets in Latin America are experiencing significant growth, driven by increasing internet penetration and a shift towards digital payments. Key trends include:

  • Growing e-commerce adoption: More consumers are embracing online shopping, particularly via mobile devices.
  • Rise of digital payments: Fintech solutions are becoming more popular as an alternative to traditional banking, with increasing adoption for both online and offline use.
  • Increasing mobile-first economy: Mobile devices continue to be the primary access point for most consumers in Latin America.
  • Preference for local payment solutions: Local payment methods tend to be used more than credit and debit cards.

Competitive Landscape

The markets are very competitive with a blend of global players and local competitors. The largest threats to MELI come from:

  1. Global retail giants such as Amazon, which also offers online retail in specific countries.
  2. Strong local players which exist in each country, offering targeted solutions to specific local market needs.
  3. Other fintech and credit players that are not tied to any e-commerce platforms.

What Makes MELI Different

Despite the tough competition, MELI does have a few advantages over them

  • Deep market expertise The company has a wide knowledge of their local consumers and markets. It has many years of operations in Latin America and has created a valuable brand.
  • Strong ecosystem By integrating e-commerce with fintech solutions and logistics, the company is able to create a robust ecosystem that is hard for competitors to replicate.
  • Scalable platform: MELI’s proprietary technology allows for rapid expansion and innovation.

Financials

In recent years, MELI’s revenue has shown consistent growth, but profitability has been volatile. The latest financials from September 30, 2024 demonstrate strong YoY growth across their different revenue segments. The company has been improving operating metrics by streamlining operating procedures, cost cutting, and investing in areas of high growth. Some noteworthy financial aspects:

Income Statement:

  • Revenue Growth: MELI’s revenue has demonstrated robust growth, with net revenue increasing by 37.6% YoY to $14.7 billion, with impressive growth rates across different geographies.
  • Gross Profit: Gross profit margins remained stable, demonstrating operational efficiencies. The company has maintained around 50% gross margin.
  • Operating Income: The company has increased its operating income by 27% YoY to $1.9 billion. This increase stems from higher revenues with controlled cost and expenses
  • Net Income: The company has successfully improved its net income to $1.3 billion for the nine-month period ended September 30, 2024, showing progress towards improved profitability.
    • Net income and net revenues have increased due to an increase in sales and finance revenues.
  • Effective tax rate: Tax rates vary based on the jurisdiction in which profits are earned. The Argentine and Mexico branches had the higher taxes of 45.9% and 39% respectively.

Balance Sheet:

  • Cash Position: MELI maintains a solid cash position of about $2.2 billion, providing ample liquidity to maneuver through changes in the economic environments.
  • Loan Portfolio: The loan portfolio has continued to grow, as the company expands its reach in financial instruments. This growth in financial receivables will be a key variable to track in coming quarters. It is important to monitor closely whether the growth in this area may impact the company’s financials negatively by increase in defaults and the bad loan provisions.
  • Liabilities: Overall, the firm’s balance sheet is quite strong, as they have very good assets compared to liabilities (asset-to-liability ratio). The liquidity ratio indicates that they do have enough assets to cover their current debt payments.

Cash Flows:

  • Operating Cash Flow: Net cash provided by operating activities increased YoY, mainly driven by improvements in profitability. For the nine-month period ended September 30, 2024, it stood at $4.9 billion compared to $3.7 billion last year, with increased cash flow generation in the period.
  • Investing Cash Flow: The company has high CapEx in their business, as they are in the process of expanding their infrastructure in the various regions. MELI also is investing in a myriad of financial instruments, and this means a large outflow of cash flow in this segment.
  • Financing Cash Flow: The company has been issuing debt to support their various business operations.
  • Overall Cash Flow: MELI has maintained a solid cash flow position despite a lot of capex in infrastructure, and acquisitions.

Share repurchase program: On February 21, 2023, MELI announced a share buyback program of $1 billion, showing their intent to enhance shareholder value. It was followed up in November 2023 by another announcement of another $1 billion buyback.

Note that for the above metrics, the numbers are for the nine months ended September 30, 2024 unless explicitly stated otherwise.

Recent Concerns / Controversies:

  • The company had some bad credit performance during the recent quarter, with provisions for doubtful accounts increasing to offset potential defaults.
  • Foreign currency volatility, particularly in Argentina, has introduced instability in revenues and profitability. Also new regulations that have been put in place by the Argentine government might introduce additional challenges to profitability.
  • There has been a recent decline in the share price, reflecting some concerns about slowing economic growth in Latin America.
  • Competition is increasing with large global and local players.

Moat Rating: 4/5

MercadoLibre exhibits a strong and wide economic moat, derived from:

Network Effects: As a marketplace, the more users that buy and sell on the platform, the more attractive it becomes for other users, creating a powerful network effect. Buyers and sellers are naturally drawn to MELI’s marketplace because it has more participants.

  • Brand: MELI has spent years building trust among buyers and sellers in Latin America through their platform, giving the company a strong brand moat, and making it tough for competitors to displace them
  • Switching Costs: By incorporating financial services, and logistics on their platform, the company increased switching costs for both buyers and sellers. If a business is using Mercado Pago, it is highly unlikely they will chose other marketplaces.
  • Economies of Scale: MELI operates across many markets and regions in Latin America. This provides a competitive advantage through better prices and better logistics.

However, this moat is not impenetrable:

  • Competition is very high: Amazon, and other regional players, can offer similar alternatives that threaten MELI’s market share.
  • Technology is always shifting: New technologies may disrupt some of MELI’s services by making them more efficient, cheaper, and easier for competitors to replicate.
  • Regulations can change, affecting the company’s business practices. Government policy is also always a threat to companies with wide scale.

Despite some challenges, the moat is powerful enough to give a rating of 4/5.

Understandability: 3/5

The business model of MercadoLibre is moderately complex.

  • While the concept of an e-commerce marketplace is easy to grasp, it becomes complex when combined with a wide variety of products, a vast geographical region, and numerous financial offerings.
  • The financial metrics of MELI are not that hard to understand, but one does have to keep in mind things such as inflation accounting, foreign exchange, and other macroeconomic factors that have huge influence on the company’s performance.

Balance Sheet Health: 4/5

MecardoLibre’s balance sheet is mostly healthy, which gives it a rating of 4/5.

  • The cash position is really solid, which means they can effectively manage debt and handle any short term downturn.
  • The company also has a great debt-to-equity ratio that ensures sustainability
  • There is still some concern from the growing loan portfolio which needs to be actively monitored.

The Essays of Warren Buffett: Lessons for Corporate America - A Summary

This book compiles a series of letters to the shareholders of Berkshire Hathaway, and was selected and arranged by Lawrence A. Cunningham. It provides insight into Warren Buffett’s investment philosophy across a range of topics. I will summarize the key teachings and lessons in the book here.

Buffett repeatedly reinforces that managers should act as owner-operators of a company, emphasizing the importance of a long term vision, acting ethically, and being transparent with all stakeholders.

  1. Owner-Orientation: Managers should think and act like owners, focusing on long-term value creation for shareholders.
  2. Transparency and Candor: Management must communicate openly and honestly with shareholders, disclosing both successes and failures.
  3. Integrity and Ethics: Ethical behavior is paramount, and any form of manipulation or dishonesty should be avoided.
  4. Capital Allocation: The primary role of management is to make wise decisions about capital allocation, balancing reinvestment with distributions to shareholders.
  5. Long-Term View: A long-term perspective is crucial, avoiding the temptation of short-term gains at the expense of long-term growth.

Corporate Finance and Investing

Buffett provides a critical view of modern financial theory and provides his own way of looking into investing, focusing more on value and less on current prices.

  1. Rejection of Efficient Market Theory: Buffett challenges the notion that markets are perfectly efficient, citing instances of irrational behavior that creates opportunities for value investors.
  2. Value Investing: Buffett advocates for buying businesses when the price is significantly less than their intrinsic value, regardless of current market perceptions. He calls this “bargain-purchase investing.”
  3. Intellectual Honesty: He rejects the idea of “playing” the market and stresses to rely on common sense, hard work, and thorough analysis.
  4. Understanding Business: A thorough understanding of a business’s economics is essential, including its profitability, competitive advantages, and long-term prospects.
  5. Patience: Investors should exercise patience and be willing to hold onto investments for the long term.
  6. Avoid Technical Trading: He urges investors to not rely on short term trading strategies and to rather concentrate their efforts on selecting sound businesses based on fundamentals.

Common Stock

Buffett stresses that when purchasing stocks, investors must see themselves as part owners of the business and not mere speculators.

  1. The Nature of a Stock: Stocks are not just ticker symbols or numbers but are ownership stakes in a business.
  2. The Importance of Earnings: Focus on real earnings and not just reported accounting earnings.
  3. Dividends It is imperative to keep dividends in perspective, and that sometimes retaining earnings and reinvesting in the business is the best case.
  4. Stock Splits and Trading: Stock splits provide little value for the owner and merely entice market participants. It creates a great opportunity for brokers to profit from these short-term market movements.

Mergers and Acquisitions

Buffett cautions investors on the potential danger of mergers and acquisitions, highlighting many cases where acquisitions are harmful to the acquiring shareholders.

  1. Acquisitions as Value Destruction: He describes the many acquisitions that destroy value because of overpaying for targets, using stock as currency, and because of unrealistic synergetic potentials.
  2. Sensible Repurchases: Stock repurchases are generally good for the company if it is purchased at a price below intrinsic value.
  3. “Double-Barreled” Acquisition Policy: He prefers to acquire 100% of businesses through private transactions at fair prices.
  4. Caution on High Premiums: Buffett warns against mergers with high premiums which reduce value for acquiring shareholders.

Accounting and Taxation

Buffett warns investors to pay close attention to accounting and that there are many ways it can be manipulated. He insists on the use of sound and transparent accounting policies.

  1. Accounting Shenanigans: He criticizes some accounting practices that manipulate earnings and mask the true financial position of a company
  2. Importance of Economic Goodwill: Buffett puts emphasis on economic goodwill and not the accounting goodwill, and how both concepts differ.
  3. Owner Earnings and Cash Flow: He pushes for the idea of owner earnings, which represent what can actually be taken out of a business rather than earnings per share or book value.
  4. Taxes: Focus on the effects of taxation on earnings and investment, and how this affects financial decisions.

Management and Shareholder Relations

Buffett advocates for active and intelligent ownership, urging shareholders to be well-informed and to demand transparency from the company’s executives.

  1. Incompetent Managers: He emphasizes that managers should act ethically, and that ethical lapses should serve as a red flag.
  2. Shareholder Responsibility: Shareholders should not be passive recipients of financial reports but should take an active role in corporate governance.
  3. Executive Compensation: Compensation should be based on the performance of the business and not other short term factors.
  4. Rejection of Short-Term Metrics: Investors need to focus on the fundamentals instead of earnings-per-share figures.

Additional Notes:

  • “Margin of Safety”: Buffett emphasizes that a margin of safety is paramount to successful investment. The margin of safety is essentially the price you pay relative to intrinsic value, and it will help protect your principal.
  • Be patient: The core advice for the reader to be an intelligent and successful investor is to be patient and only make investment decisions when there is a significant margin of safety.

The central theme that weaves through the entire book is the importance of acting as a business owner and not a speculator. Buffett advocates for the application of the principles of value investing with a long-term vision and great financial analysis.

Common Stocks and Uncommon Profits - A Summary

In his classic book Common Stocks and Uncommon Profits, published in 1958, Philip Fisher outlines the importance of growth investing and provides his guidelines on how to assess companies.

Clues From the Past

Fisher highlights how spectacular fortunes have always been made by buying stocks in well performing companies, and staying with them long term. The author claims that companies should have great long term prospects, but this prospect should be evaluated properly through a deep analysis of the company.

  • He also stresses how market crashes and cycles are very common, and that it is a great opportunity to pick undervalued stocks during those times
  • Fisher also highlights that in that time, corporate management had become a lot more sophisticated. Before, these corporations were generally family owned, and the managers were also relatives and friends of the owners, but now more and more executives are professional business people.

“Scuttlebutt” Can Do

Fisher believes that data can be gathered from outside a company through talking to a wide range of people about the company. He calls this “scuttlebutt” method, and he emphasizes that this can produce much more actionable data than what can be gathered from traditional financial analysis. The author recommends reaching out to clients, competitors, and former employees. This should give a much broader and honest opinion about the company’s operations, management, and strategy.

What to Buy: The Fifteen Points to Look For in a Common Stock

Fisher outlined fifteen points for evaluating companies, which are listed here. His points are an all-encompassing guide for evaluating companies on their operational, financial, management, and strategic aspects.

  1. Growth Potential: Does the company have products or services with sufficient market potential to allow significant growth for at least several years?
  2. Development: Is management determined to continue developing products or processes for future growth?
  3. Research and Development: How effective are research and development efforts compared to the company’s size?
  4. Sales Organization: Does the company have an above-average sales organization?
  5. Profit Margin: Does the company have a worthwhile profit margin?
  6. Improving Margins: What is the company doing to maintain or improve profit margins?
  7. Labor Relations: Does the company have outstanding labor and personnel relations?
  8. Executive Relations: Does the company have outstanding executive relations?
  9. Management Depth: Does the company have depth in its management?
  10. Cost and Controls: How good are the company’s cost analysis and accounting controls?
  11. Competitive Clues: Are there any aspects of the business, such as leased land or intellectual property rights, which provide insight into the competitive environment and allow a company to compete better?
  12. Short and Long Term Outlook: Does the company have a short-range or long-range outlook in regard to profits?
  13. Equity Financing: Will the growth of the company require additional financing which will affect the stockholders benefits from anticipated growth?
  14. Management Transparency: Does management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
  15. Management Integrity: Does the company have a management of unquestionable integrity?

What to Buy: Applying This to Your Own Needs

Fisher acknowledges that not all investors will be specialists. Therefore, he suggests following his approach to find high quality advisors, that follow his investment methods.

  • He also advises to keep a portion of their investments in long term companies, and another portion in “venture capital” for higher growth. The ratio for both portfolios will depend on one’s preferences.
  • He also says that the most essential thing is to pick businesses that you have a decent understanding of.

When to Buy

Fisher states it is impossible to predict short term market movements and to rather focus on long term strategies.

  • Instead of using market timing, he suggests using a strategy of buying during times of distress and when there is a lot of fear in the market, but only for companies that have very sound financials.

When to Sell: And When Not To

The author states that selling decisions are always based on analysis of whether his original thesis still holds true. He encourages to always take note of why you bought the stock, and assess whether the assumptions remain true.

  • He suggests that you should sell if there are big changes in management structure or if the company’s growth slows down or becomes limited.
  • He also recommends that stocks be sold if they become extremely overvalued.

Five Don’ts for Investors

Fisher warns against common mistakes that are made by investors:

  1. Don’t buy into promotional companies. These tend to have a lot of promises with little to show for it.
  2. Don’t ignore a good stock just because it is traded “over the counter.” The most important thing is the fundamentals and the business model, and not the type of stock market it trades.
  3. Don’t buy a stock just because you like the “tone” of its annual report. Make sure to always look beyond the nice words and images, and base your decision on financials and company fundamentals.
  4. Don’t assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price. Future growth is the most important variable for growth stocks, and that can be worth more than current earnings.
  5. Don’t quibble over eighths and quarters. Don’t let small differences in prices get in the way of making investment decisions.

Five More Don’ts for Investors

These don’ts are more regarding portfolio allocation and management:

  1. Don’t overstress diversification: Proper allocation based on your risk and return profile is much more important than having a vast number of holdings.
  2. Don’t be afraid of buying on a war scare: These events can be a good entry point if the company’s business is not impaired from any political action
  3. Don’t forget your Gilbert and Sullivan: Investors should not have blind faith in formulas and metrics, rather they should seek to understand the true underlying business and its growth potential.
  4. Don’t fail to consider time as well as price in buying a true growth stock. Don’t buy stocks based only on current prices, but take the time to allow for the company to achieve its growth, so you may benefit from it long term.
  5. Don’t follow the crowd: Go against the consensus when you have all the information that indicates a sound investment, even if the majority does not believe so.

How I Go About Finding a Growth Stock

Fisher explains that finding a good growth stock requires a lot of work. However, the best method is to start with good ideas and then pursue further investigations by talking to all relevant stakeholders in the business.

  • One should look for companies that have leadership in their industries, good growth potential, a company culture of constant innovation and improvement, strong research efforts, and an ability to attract strong and loyal talent.

Summary and Conclusion

The book concludes by reinforcing the need for discipline, and thorough analysis before making investment decisions.

In short, Fisher highlights that the key to successful investment is finding and owning companies that exhibit characteristics of strong growth, high profitability, outstanding management, and an ability to maintain a competitive edge. The approach should be a combination of business, operations, management, financial, and strategic analysis.

The value created from all 3 texts

  • The three texts have some very similar concepts, which are:
    • Management integrity is very important to long term business success.
    • Overpaying for stocks can have terrible long term ramifications on investment potential.
    • Stock price volatility is something that has to be accepted by investors.
    • You should invest with a long term mindset, and not be driven by emotions and short term market volatility.
    • Having a good understanding of accounting principles is crucial to evaluate business performance.
  • The texts have differing outlooks on many subjects.
    • Fisher puts more emphasis on a company’s qualitative factors than its financial metrics.
    • Graham puts more emphasis on the quantitative metrics and buying at fair prices.
    • Buffett highlights the necessity of being able to understand and analyze business, and that ethical managers and honest communication with investors is essential for long term success. Buffett also incorporates both qualitative and quantitative factors in his investment philosophy.
  • The texts also provide many ways of creating value and generating wealth in the long term, which may be summarised as follows:
    • Buying well-run companies with durable competitive advantages, and holding them long term, at an affordable price.
    • Making wise decisions of reinvestment and growth to create a virtuous cycle of compounding
    • Avoiding common pitfalls such as relying too much on short-term financial figures, over diversification, overpaying for a business, and emotional biases.
  • These texts will create a well-rounded financial analysis system for investing, and provides tools and concepts that should be considered by every investor.