MercadoLibre: How Much Would You Pay for a Business With No Competition?

It's a fair question. While most analysts can't think of one, the company I have in mind is called the Latin American eBay (NASDAQ: EBAY  ) . But really, MercadoLibre (NASDAQ: MELI  ) is like eBay, (NASDAQ: AMZN  ) , and PayPal all rolled into one. 

MercadoLibre is a wonderful business, but be forewarned, at 31 times earnings, the stock is expensive. Still, that comes with the territory of being a major disruptive business in an emerging space. The best part about this free market (that's Spanish for MercadoLibre) is it owns its territory. MercadoLibre is an island, one that utilizes network effects and an ever-expanding moat to rake in the bucks. 

The network is vast
MercadoLibre operates in Brazil, Mexico, Venezuela, and Argentina and it gets around 90% of its revenue from these regions. It's basically an e-tailer that has a platform similar to eBay. It also functions much like Amazon in that customers can buy products (for a fixed price) without messing around with an auction process.


It works because of network effects. As more people use the platform, the better its marketplace becomes (think more users buying and selling stuff), and that attracts even more customers. Ultimately, the cycle feeds itself. This dynamic is pretty sweet once a business can get it rolling. Amazon works because of network effects; eBay does, too.

MercadoLibre features a payment platform called MercadoPago, which will remind you of PayPal. This platform is growing in adoption and it's becoming very popular. Last quarter, total payment transactions increased 36.3% to 9.2 million. And it has plenty of room to run. PayPal processes around 80% of eBay's transactions; MercadoPago is currently processing around 35% of MercadoLibre's transactions.

Great business, great CEO
One thing a great business must have is a great CEO. And while he's no Jeff Bezos, (no phone or tablet product and no desire to employ drones), Marcos Galperin has been around MercadoLibre for 15 years and is the co-founder. He's grown the company by making smart business decisions.

Marcos Galperin. Source: Wikipedia.

For example, the company's headquarters are in Buenos Aires, which helps minimize political risk. That's important when you do business in places like Chile, where unsettling things can happen. Galperin is western-educated; he got his MBA from Stanford and graduated from the Wharton Business School in Pennsylvania, so he really knows his stuff. It also doesn't hurt that eBay has an 18% stake in the company; it has probably given him some pointers along the way.

Galperin is aligned with shareholders as he owns around 10% of the MercadoLibre's stock. When he can't find uses for all the cash his business generates, he kicks it back to shareholders via a dividend, currently at $0.66. This leads me to believe he spends when necessary, but doesn't waste the company's money.

Key drivers
The key metrics for MercadoLibre are gross merchandise volume, total confirmed registered users, items sold, and total payments volume. This is similar to what drives eBay and (to some extent) Amazon. The difference is that eBay and Amazon compete with each other and they operate in a more developed market. Internet adoption in North America is around 80%, whereas in Latin America it's only around 50%. So as the middle class grows and these nations become more connected online, MercadoLibre will continue to flourish.

First-quarter key metrics in millions 2014 2013 % increase
Total confirmed registered users 103.7 85.7 21.1%

Gross merchandise volume

$1,797.3 $1,563.3 15%
Items sold 21.7 18.1 20.1%
Total payments volume $664 $532.1 24.8%

Source: MercadoLibre first-quarter earnings release.

But you should also know...
So in its market, MercadoLibre doesn't have any meaningful competition. In the past, when some innovative new concept popped up, management gobbled it up like the Borg from Star Trek. Right now, there's little that can challenge its dominance.

But things can and do change. While eBay owns 18% of MercadoLibre, it has recently decided to move into South America. So who knows how that will shake out. And that doesn't even include some other, better capitalized player, (think Amazon) attempting to invade MercadoLibre's turf. While MercadoLibre has a huge head start, you never know when a disrupter might get disrupted.

Foolish final words
I think MercadoLibre has everything you look for in an investment. It's run by smart management, it operates in a growing market, and it's the only game in town. It's also got that whole network effect thing working for it.

When you consider all these factors, you'll start to see the power of this business. Wish you could have gotten in on eBay and Amazon early in their growth cycles? Do some digging into MercadoLibre; I bet you'll agree, it's a special company.

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Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On July 17, 2014, at 2:57 PM, setsit wrote:

    First, your title ignores your own admission that eBay is competing with them -

    Second, the financials are overstated because of Venezuela and Argentina having official and unofficial exchange rates.

    Third, the growth has slowed

    So really not a great investment right now at these high multiples

  • Report this Comment On July 17, 2014, at 7:06 PM, DarthWader wrote:

    Hi setsit,

    1. I mentioned eBay recently entering the region, "While eBay owns 18% of MercadoLibre, it has recently decided to move into South America. So who knows how that will shake out."

    But I'm wondering how intense it will compete with MELI since it has a significant ownership stake.

    2. If we normalized the currency stuff, GMV was up 57.9% and TPV was up 63.5% in Constant USD last quarter. I got this from the first quarter press release.

    3. Growth may be decelerating, but there's ebbs and flows. I would argue these growth rates are ultra healthy, especially with MercadoPago and the buildout of its mobil platform.

    I greatly appreciate your time though!

    Fool on!

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Wade Michels

A former full time Fool, Wade believes in the bigger picture. Valuation is important, but so is having the ability to spot game-changing trends. He would rather pay a fair price for a great business than a great price for a fair business.

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