MercadoLibre Stock Analysis (MELI) | 2022 Stock Pick?

I've been meaning to look at Mercado ($MELI) for a while, and I think the time has finally come. It's one of those grossly beat down stocks... double-topped at $2,000 and now down 40% from the highs after showing a lot of relative strength in the past few trading sessions.

One of the things that interest me about MELI is diversification from US equities. I know the US has historically been the best place to invest, and definitely aligns with recent history. But, there have been times where international exposure helps... and right now, I think a lot of the capital which was allocated to Europe is coming to South or Latin America. It is definitely a different emerging market, with different risk... but also unique upside opportunities for high-growth.

One of those being MELI... which many are calling "the Amazon of Latin America".

And that explains the FOMO.

Business Model

First, as usual, let's go over the business Model. Assuming you already know Amazon, then you already have a head start... that's what Mercado Libre is – their marketplace, which is growing at double digits.

Although they don't really describe it like a flywheel, Mercado has other business segments, which do act like a flywheel and increase usage across the board. Mercado Envios is a shipping solution that is doing a superior job in Latin America. The infrastructure is underdeveloped, which is why its been a challenge for companies like DHL, FedEx and UPS... but given the increasing volume (and majority) penetration of their own network on Mercado Libre, it's clear that Mercado is doing an excellent job.

Mercado also has its hand in fintech with Mercado Pago and Credito – its own payment processor like Amazon Pay, and its own credit portfolio like other fintech pure plays (think SoFi). The latter I found pretty interesting. They give loans to merchants and consumers. This appears to be more than just a value-add service to Mercado.

Operating Metrics

In any case, we'll use Total Payment Volume (TPV) to analyze the FinTech business and Gross Merchandise Value (GMV) to assess the Commerce business. You should be familiar with these terms if you've been watching my past videos.

Mercado officially breaks its operating segments by Region. I guess, this is more effective way to manage the business. But, as an investor, who is simply looking for Emerging Market exposure, I'm more interested in seeing the business by Commerce and Fintech (which we'll get into in our Valuation). But, nonetheless, it's interesting to see which regions are outperforming.

Moat

One of the questions I always try to answer, is what is the company's moat and hw strong is it? That's two questions, I know. For Mercado I would say their moats are brand recognition, network effect, and pricing power (i.e. scale). They have grown a huge deal in Latin America, and the recognized leader. It's arguably the same moat that Amazon enjoys in North America (and other parts of the developed world).

Valuation & Forecast

As a reminder, all valuation sheets are available to premium members of The Hawk Letter and Discord. I highly recommend you join, to make your own assumptions and investment thesis :)

Mercado has enjoyed significant growth, as you'd expect, during the pandemic. They grew revenues nearly 80% in 2021. As, you'll see, I broke revenues into the Fintech and Commerce segments. QoQ it isn't clear which is growing faster, but they are very closely related. This tells me the fintech is likely piggybacking off the marketplace, and can eventually lead to something bigger. In any case, it is also clear that growth is slowing post-pandemic. However, these are still insane growth numbers... the question is how much is sustainable.

It's tough and risky when trying to make these assumptions for an investment. So, just be aware of that... which is why I always go conservative. I'm forecasting them to have half the growth rate each of the next three years.

My revenue forecasts align with mean analyst consensus, but they have higher EPS projections. But, I'm cautious about inflationary pressures.... which is why I feel more comfortable being conservative here.

I get a FV per share, based on my DCF, of $856. I've seen Simply Wall St. with a FV per share of nearly $4,000 – which I think is crazy... but, I'd have to look at their assumptions. It's likely coming from my more bearish margins. In any case, just another data point.

Price Target

After factoring other valuation multiples, like target P/FCF, P/S, and P/E... I can easily see the case for $1,000+ share price of MELI. Given the risks, and the environment we're operating in... I won't be greedy. I'll gladly buy shares if we re-test the lows, at $875. I'll place my limit orders there.

Risks

There are a ton of geopolitical risks with MELI. This is an emerging market, and given the rising rate environment, and post-pandemic growth in the sector still being a question mark. I'd consider all of those things. I won't go in to each in detail, but I think it's a fair bet at my target buy price.

Concluding Thoughts

Overall, despite the geopolitical risks, I also think it's a good idea to diversify from US equities exposure. Most of my portfolio is US and USD exposure, so it doesn't hurt to have a smaller percentage allocation internationally. It won't be a majority position, but it does make sense to take part in.

But, of course, you'll have to assess and take action based on your own risk tolerance :)