Thursday, December 24, 2009

IBD: Mercadolibre (MELI) - E-commerce Sales Soar as Latin America's Households Get Wired

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As I peruse our archives, I noticed I have not spoken about former fund holding Mercadolibre (MELI) once in year 2009; so with time running out on the year, we should sneak one in.  We last owned this name in 2008, but in a year like that - a high valuation foreign growth stock is not exactly a harbor of safety and it was difficult to make any money.  Our last sale of the name was August 2008 around $35; within 2 months the stock actually was down at $10. Much like Baidu.com (BIDU) in China, this is a dominant franchise in its region / niche - but never cheap.  Currently MELI sits at 73x forward 09 estimates - having traded both for many years, it's rare to see them every even at the 30-40x forward estimates range. 

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Investors Business Daily does their normal excellent, and easy to absorb, summary of the company.  Just as I said in 2007, and 2008 - I am blown away Ebay (EBAY) [who is a part owner] or even an Amazon.com (AMZN) has not come in and swooped the franchise up:
  • Marcos Galperin saw the future of Latin American retail while working on his MBA in 1999.  At the time, Galperin, a student at Stanford University Business School, viewed Latin America's retail scene as inefficient. Large shops were only in big cities.
  • The well-populated remote areas had no shopping centers. Galperin figured he could make it easier for consumers and retailers to access each other by launching an e-commerce marketplace.  After crafting a business plan, Galperin got a big break. A professor introduced him to John Muse, co-founder of the Hicks Muse private equity firm.  Galperin ran his plan by Muse, who quickly grabbed at the chance to invest in the idea.
  • Soon after, Galperin assembled a small team. They got together in a garage in Buenos Aires and launched MercadoLibre (MELI ) in August 1999.  "The company has grown strongly ever since," said Galperin, who's CEO.
  • Today, MercadoLibre is the largest e-commerce site in Latin America, where it has platforms in 12 countries, says Galperin.  Sales have soared from $85 million in 2007, the year it went public, to $137 million last year. Analysts peg 2009 sales at $180 million, says Galperin.
  • The company has enjoyed double-digit sales gains every quarter since going public.   Most recently, in the third quarter, sales climbed 26% vs. a year ago to $50.6 million. Profits jumped 69% to 22 cents a share.
  • "The adoption of the Internet in Latin America is behind that of the U.S. and other developed countries," said Craig-Hallum analyst Mark Argento. "MercadoLibre is in the high-growth phase of their business because the Latin American market is somewhat behind."  As Latin America plays catch-up, the region has enjoyed rapid growth in PC penetration and broadband and Internet usage, says Galperin.
  • The region's Internet penetration, he adds, has climbed to 30% from 3% in 1999.  Latin America has among the world's lowest broadband penetration rates, at just 5.8% at the end of the first quarter, according to broadband research firm point 15pic.  But broadband has grown fast to 24 million households in select Latin American countries in 2008 from 2 million in 2002, according to a MercadoLibre presentation.
  • The MercadoLibre marketplace lets businesses and consumers sell items in a fixed-price format a la Amazon.com (AMZN) or auction style like eBay (EBAY), which owns 18.42% of MercadoLibre.
  • It also offers an online payments feature called MercadoPago. (i.e. Paypal - the crown jewel of Ebay)
  • Galperin says 95% of transactions are done on a fixed price. A hefty 80% of goods transacted are new. Retailers account for a large share of total trading.   Retail sellers are small- and medium-size players based in Latin America.
  • MercadoLibre gives consumers an opportunity to buy goods that may not be available at other retailers in Latin America, he adds. A lot of products sold on the site are brought in from other countries.
  • Argento says MercadoLibre is well suited to the Latin American market.  "The online-marketplace model is more common in Latin America, where there's typically a lot of smaller mom and pop operators rather than big behemoth retailers," he said. "That's a reason why it works."
  • The site had 2.5 million sellers in 2008, 40,000 of which made a living doing business on MercadoLibre, says Galperin.
  • ... it now has more than 40 confirmed registered users, up 26% from last year. Gross merchandise volume, or the dollar value of all transactions, rose 34% vs. a year ago.  It also saw a 43% jump in items sold.
  • Brazil, which emerged from the recession sooner than any other Latin American country, accounts for 50% of MercadoLibre's business.  The remaining 50% is spread out among the other countries where it operates.
  • Less than 5% of retailing in Latin America is done online. So it has lots of room to expand.
[Nov 12, 2008: Mercadolibre with Good Earnings]
[Jul 19, 2008: Mercadolibre Up 15% on Termination of CEO Stock Sale]
[May 14, 2008: Mercadolibre Reports]
[Mar 31, 2008: Mercadolibre with 3PM Spike/Forbes Article]
[Mar 6, 2008: Cutting Mercadolibre in Half on Nice Earnings]

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