Monday, March 31, 2008

Mercadolibre (MELI) with a 3 PM Spike

Quite an interesting intraday chart for Latin America e-commerce play Mercadolibre (MELI); I don't see definite news yet but it appears to be a withdrawal of their secondary stock offering which generally creates an overhang above a stock...

I don't have a major position in this name as it's been consolidating for a long time and this secondary has been an issue but I was poking around the news today and noticed this nice write up by Sramana Mitra, who has an excellent blog that I frankly do not have the time to get to enough. Too much information on this internet; not enough waking hours. I like the market statistics that she put into the article which I generally gloss over when I do a write up, and her commentary on how the company "grew up". I do agree with the media's lack of attention to many interesting emerging markets; rather focusing it's love for all things Chinese (I've mentioned this in my India pieces many times)
  • There is a market of 500 million people--about 8.6% of the world's population--that the business media all too often neglects as it serves up story after story about China and India. That would be Latin America.
  • Between 2000 and 2007, the number of Internet users in Latin America grew from 18.1 million to 122.4 million, a compounded annual growth rate of 32% compared with only 12% in North America during the same period. Chile has the highest penetration of 43.2%, with Argentina at 39.7%, Brazil at 22.4%. Average penetration across Latin America is approximately 21.5%, as compared with 71.4% for the U.S.
  • Not surprisingly, Latin America is developing its own collection of Internet stars. One that has really caught my eye is MercadoLibre (nasdaq: MELI), an online marketplace that facilitates buying and selling of computers, electronics, photography equipment, household items, even cars.
  • Although MercadoLibre had a rocky start, the company has started delivering stellar results, growing at over 60% and profitability is increasing steadily. The moral of this story: It takes patience to build a great company, even in Internet time. Now, I believe MercadoLibre has an opportunity to become a billion dollar enterprise in the next 10 years and be a force in Latin America's economy.
  • For the year ended Dec. 31, 2007, MercadoLibre's annual revenue increased by 63.5% to $85.1 million. And MercadoLibre is also profitable: Net income for the fiscal 2007 was $9.7 million, a nice jump over the $1.1 million reported for the company's in fiscal 2006. Their 2007 diluted earnings per share of 22 cents met analyst expectations to the penny.
  • MercadoLibre has now become the No. 1 online marketplace for Latin America. It facilitates the buying and selling of merchandise in the same way that eBay and Amazon do. Items range from computers, cameras and MP3 players to furniture and household items to cars. The business, unlike eBay's auction-based model, is primarily driven by fixed price transactions. In that sense, they are closer to Amazon. Mercado also has an online payment offering a la Paypal called Mercado Pago, that is seeing good adoption and has huge potential to facilitate commerce in the Latin America market.
  • Some of MercadoLibre's strength comes from simply outliving its local competition. Language and culture, I believe, are substantial barriers to international competitors, as the big companies have discovered in China. (Even so, eBay holds a 20% stake in MercadoLibre--a smart strategy for the U.S. company.) The region does not have an active venture capital industry, so future competition is likely to be limited. Those factors give MercadoLibre a nice, clean runway to build their business without a lot of interruption and dominate Latin America's e-commerce industry.
I've stated in the past I doubt Mercadolibre (MELI) will be an independent entity in the long run; in fact I am surprised each quarter that passes that it remains on it's own. Valuation? Off the charts. Scarcity value? Also off the charts. When dreamers are putting $15 Billion valuations on Facebook, which can't find a way to generate meaningful revenue, I can only cringe - here is a far more valuable entity for less than $2 Billion. An interesting company all around.

Long Mercadolibre in fund; no personal position

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