At the beginning of the year, I picked MercadoLibre (MELI) to be one of the winners in 2021 and beyond. This is how the stock price has behaved since then

It started the year around $1,640, reached around $2,000 in Feb and has been on a steady decline since then and now around $1,348 so down about 20% so far for the year. But as I wrote in this article that the stock price is a noise, not a signal. If you looked at the 20% fall in the stock price and concluded that this is not worth your investing dollars, you might be missing out on the story. So let’s talk about the business of MercadoLibre.

MercadoLibre started in 1999 with operating a marketplace in Latin America for online commerce. The population in Latin America is more than double the size of the U.S and severely underbanked and infrastructure for shipping is not ideal. So MercadoLibre has been heavily investing in their logistics and shipping network to make sure that buyers receive their items on time. They sell basic goods like Amazon does and have online auctions like eBay and they operate in 18 countries in the Latin America. They are headquartered in Argentina and have operations in Argentina, Mexico, Brazil, Chile and expanding in other countries as well. 

One of the troubles that their management was having in their early years was that 70% of the adults in Latin America are unbanked. You can imagine that if someone does not have a bank account, it would be particularly difficult to buy things online. Therefore they launched a division called Mercado Pago that would enable buyers to buy things online. Pago is an online payment system where anyone can deposit money with a neighborhood store and then they can use that money for online transactions at the MercadoLibre platform or outside their platform for other merchants. Think PayPal, Apple Pay and Square all rolled into one. This payment system is invaluable for an economy like Latin America where so many people don’t have access to bank accounts or credit cards. 

Mercado Pago is unique and even PayPal recognized that and they invested $750 million in MercadoLibre in March 2019. MercadoLibre management invested this money to improve the logistics infrastructure. These investments were timely for the lockdowns in the pandemic. The management was able to open more than a thousand package drop off locations in Brazil. They purchased 4 cargo aircrafts in each country to serve their largest markets.

In 2020, some of these investments paid off handsomely as you can see in the tables below in their numbers

Gross Merchandise Volume (in $ billions)

Q1 Q2 Q3 Q4
2019 $3.1 $3.4 $3.6 $3.9
2020 $3.4 $5 $5.9 $6.6
2021 $6.1

I have bolded the numbers in the pandemic. Note that these numbers, although great, are even more impressive in local currencies. Because MELI is an international company, they have to report their results in US Dollars but their operations are in local currency. So for example, their Q1 2021 growth in US Dollars is “only” 79% (6.1 divided by 3.4), in local currencies, it is even more impressive at 114%.

I also want to talk about the number of items sold on MELI platform as it shows the scale at which they are operating. 

Number of Items Sold (in millions)

 

Q1 Q2 Q3 Q4
2019 83 89 98 110
2020 28 101 110 229
2021 222

 

Once again, I have bolded the numbers in the pandemic and you can see that the investments that the management made in the pandemic in their logistics are paying off big time.

What makes me most bullish in MELI for the next 10 years is the growth in their payment volume. Earlier in their life, MELI was an e-commerce company like Amazon or eBay. However, in the last 5 years or so, they have transformed themselves into a fintech company as well. They launched this Pago division so that people can use it to make payments on their website to buy stuff. However, as you can see its numbers below, the off-platform payments (payments not on MELI website) have grown to be a larger part of the pie. That means that people are using Pago for not just buying stuff on their website but also to pay their utility bills, make payments to other merchants and even receive their paycheck. So, this allows MELI to drive their profit margins higher. Let’s look at how the payment volume on MELI has grown in the last 2 years

Total Payment Volume in $ billions

Q1 Q2 Q3 Q4
2019 $5.5  $6.5 $7.6 $8.7
2020 $8.1 $11.2 $14.5 $15.9
2021 $14.7

 

Once again, the pandemic numbers are in bold. However, what is more interesting is the growth in Off-Platform payment volume.

Off-Platform Payment Volume in $ billions

 

Q1 Q2 Q3 Q4
2019 $2.5 $3.2 $4.0 $4.7
2020 $5 $6 $8 $9.2
2021 $8.5

As you can see, what started as a way for people to make payments on their platform has turned into a meaningful revenue driver and the off-platform payments are contributing even higher to their bottom-line.

Long story short, if you look at the stock price chart of MELI in 2021, you see a 20% decline, which might make you afraid but if you zoom out and look at the last 5 year chart or 10 year chart, you will be amazed at the growth. On top of that, you might be scared by the high stock price but as I talk in this article, look at the market capitalization and don’t pay attention to the individual stock price. MELI’s market cap is $66B. In contrast, PayPal market cap is $285B, Square market cap is $92B and Amazon’s market cap is approaching $1.7 T. I am not saying MELI will get to $1.7 T but even if it gets to half that number in the next ten years, it will be a 12 bagger from here. I have been a holder of MELI since 2012 and it is one of my biggest positions. They are operating in so many areas that it has become difficult to keep track. Take a look at this chart to get an idea of optionality. After seeing its performance in the pandemic and thinking about the future make me even more bullish on MELI for the next ten years.