Left Brain Thinking: December 23, 2020

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're taking a fresh look at MercadoLibre, ticker symbol M-E-L-I, the international marketplace that has been a high-flying stock that the Left Brain crew thinks has potential for more. Here to discuss it is Brian Dress, the director of research at Left Brain Investment Research. But if you want more information on what you hear Brian and I discuss, well, you can find the fresh look on MercadoLibre, but all of the fresh looks at leftbrainir.com, and you can follow them on Twitter @leftbrainir. And while we're at it, we should point out that the fortune makers series, which has been a series of live Zoom events. This time it's going to focus on cybersecurity, is coming back in January, January 7th at 5 PM Eastern time. Complete details are available on the leftbrainir.com website, or you can search Left Brain Investment Research on Eventbrite. Brian Dress, great to have you back on Left Brain Thinking.

Thanks so much, Chuck. It's good to be with you again and your audience.

MercadoLibre. This is a stock that, well, I mean, if you understand Amazon, you understand at least part of their business model. I don't want to compare it that way. I just am more curious, a stock that has been flying like this one, why do we think it can fly higher without getting too hot and getting burned?

Yeah, Chuck, great question. MercadoLibre has been around for about 20 years, started in 1999 with the current CEO as the founder and Marcos Halperin. It's been a hot stock the last 2 years. It's up about 500% in the last 2 years, which obviously gives a lot of investors pause, but we see so many growth opportunities for this stock. It's got 3 major businesses. It's got the marketplace, which is similar to Amazon. It's got digital payments, kind of similar to Square, and it's also got shipping fulfillment and warehousing. So there's a lot of ways to win here in the Latin American market.

That being the case. Is there one primary thing that is driving it or that is gonna make it that it can continue the good run it's been on?

Well, there are a lot of opportunities in Latin America. You know, it's not as mature obviously as the Western world in terms of its economy. There's only about 2.9% of commerce takes place in e-commerce, so it's a huge greenfield opportunity for MercadoLibre, and they're definitely the first mover there. And then you also have 650 million people who are unbanked in Latin America. So a huge addressable market from the payment side as well. Like we said, multiple ways to win here for this business.

One of the things that impressed me when I was looking at the FreshLook piece is just how much free cash flow, how much money this stock has been throwing off. Obviously that creates a lot of different possibilities going forward, but it's such a big gusher that this company has seen the way you guys like growth, does it have to continue at this frantic pace or is it okay if things settle down?

Yeah, I think it's okay if things settle down. Take a little step back. This is a stock that has really benefited from the pandemic over the last 5 years. Revenue growth has been around 33% on an ongoing basis, but for the last 7 quarters they've grown by over 50% each quarter on a year-over-year basis. And unbelievably, we've seen revenue growth well in excess of 100% in the last couple of quarters. So we're not going to go ahead and expect that to continue. We understand obviously the idiosyncratic aspect of the pandemic, but we do see incredible growth in, in a lot of the business segments here. 381% growth in the payment segment in the last quarter, just unbelievable. And then our senior analyst Janice Kwok, who did the Fresh Look report here, says there's an $80 billion total addressable market for this company. With its 3 segments, and there's just only 5% penetration so far. So a lot of room to run for MercadoLibre.

A lot of room to run, but is there going to be a reverse fallout, do you think, from the pandemic? In other words, you got these companies, they benefited from the pandemic, they in many cases got ahead of themselves or perceived to be ahead of themselves. Does there come a point, even though you're expecting things to slow down a little bit, that there's a backlash at pandemic stocks?

That might be the case in the short term, but Chuck, as we always say, we're looking for long-term growth opportunities here. And the shipping fulfillment and warehousing was a very small part of the business coming into this. Janus tells us that absolutely there's a lot of stickiness in that business. So this pandemic, it's not going to continue the way it's going as it is today, but we do expect some stickiness in that business. And Mercado Pago, the the digital payments, absolutely a lot of stickiness in that platform as well. So like you said, we don't expect these 100% growth rates to continue into the future necessarily, but we do see a lot of growth, especially because Latin America is just such an immature economy compared to the Western world. And so there's just so much opportunity in e-commerce. Like we said, just 3% of commerce is e-commerce and so many people unbanked. In Latin America. Just see so much opportunity for MercadoLibre to continue this amazing growth trajectory that it's on right now.

We mentioned an Amazon or a Square or what have you, the companies that this resembles. Because this is that kind of business in another country and it has the foothold, is there any thought that this might at some point be a takeover play?

That's a good point. That's possible. We wouldn't be happy if that was the case. Of course, we want to participate in the growth of this business as long as possible. I'm glad you mentioned Amazon. I think this is an important point for MercadoLibre. Like I said, MercadoLibre has been 20 years in this market. They know what's going on there. They have a strategy that's been working and Amazon's been really slow to enter this market. I think the obvious question is, do you worry about Amazon for MercadoLibre? Of course we do, but this is the biggest platform of its kind in Latin America. It's number 1 or number 2 in every country, including Brazil. Argentina and Mexico. And so the first mover advantage and the rapid expansion has really created a moat for this business, which is important because obviously Amazon, the behemoth, sits on the side, and we don't want to be in a situation where competitive advantage is not going to be there for us. But we do think MercadoLibre has a strong competitive position despite the fact that Amazon sort of lurks in the background.

Brian, really interesting stuff again for the our audience. There's a lot more in the fresh look that is at leftbrainir.com. Thanks so much for joining us. Happy holidays. Look forward to doing this with you again down the line.

Thanks, Chuck. Happy holidays and a happy and prosperous new year to our audience.

Left Brain Thinking is a joint production of Left Brain Investment Research and MoneyLife with Chuck Jaffe. Our conversations are not personalized investment recommendations, but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm Chuck Jaffe, your host, and you can learn more about my weekday podcast at moneylifeshow.com. Thanks to my guest Brian Dress, Director of Research at Left Brain Investment Research. Learn more about the firm and its January 7th Fortune Makers live Zoom event by going to leftbrainir.com, and they're on Twitter @leftbrainir. Left Brain Thinking is available every Wednesday Please subscribe on your favorite podcast app and plan to put your left brain thinking cap on every week. Until then, happy holidays, everybody. Please stay safe.