I've previously written about my first investment and the success I have enjoyed with streaming giant Netflix, Inc. I'm back to detail another early investment. In April 2009, just as the U.S. economy was coming out of the depths of the recession, I invested in MercadoLibre, Inc. (NASDAQ:MELI), the premier online auction site in its native Latin America, similar to eBay Inc. (NASDAQ:EBAY). The two companies competed for a time, before eBay conceded and acquired a 19.5% stake in MercadoLibre while agreeing to act as a trusted advisor and mentor.
At the time, MercadoLibre was referred to in the financial media as the "eBay of Latin America," but even then, the company was so much more. In May of that year, I wrote:
MercadoLibre is the Craig's List, eBay ... and PayPal (NASDAQ:PYPL) of Latin America all rolled up in one. They are the number one or number two provider in most of the countries they serve. Latin America's internet usage is growing, but has a long way to go to catch up with the percentage of internet users in the US.
MercadoLibre provided auction sales similar to eBay, but also had classified ads similar to Craigslist, fixed priced sales similar to most other e-commerce websites, and its online payment system MercadoPago, which was modeled after PayPal.
The attraction was the compelling demographics
I am an accountant by trade and am fascinated by numbers, and what drew me to this company wasn't any special insight, but an amalgamation of publicly available data on several intriguing demographics. MercadoLibre counted Brazil as one of its largest markets (back then part of the BRIC acronym of emerging markets -- Brazil, Russia, India, and China).
In 2009, internet penetration in Latin America was estimated at 31%, and while it had one of the fastest-growing online populations in the world,it still paled in comparison to the U.S. penetration rate of 76%. The region also had a fast-growing emerging middle class that represented only 29% of its population, compared to 43% in the U.S.
Finally, much of the population in Latin America still conducts business in cash, and credit cards are the exception rather than the norm. Providing users with MercadoPago, a secure payment method modeled after PayPal, was an early strategic decision that became one of the pillars of future growth for MercadoLibre.
It wasn't all fun and games
There were challenges to following MercadoLibre. The company did business in the numerous currencies of Latin America, but it reported in dollars, as required by the SEC for listing on a U.S. exchange. This resulted in exchange rate issues that often masked stellar growth. As an example, for the quarter that ended in June 2009 -- my first quarter of ownership -- MercadoLibre reported revenue that increased by 19% over the prior-year quarter, when measured in dollars. When measured in local currencies, though, that growth was 42% year over year.
To compensate for these exchange rate issues, I began to follow three non-financial metrics that were more representative of that growth: users, items sold, and payment transactions, which would strip out the currency fluctuations. During that same quarter in 2009, users increased by 34%, items sold increased by 35%, and payment transactions increased 42%, which showed that growth was robust and consistent.
Another challenge of being a shareholder was the economic and political turmoil that frequently flares up in the region, which includes Brazil, Argentina, and Venezuela. Over the ensuing eight years, the region dealt with currency devaluation, inflation, recession, and political corruption. Even today, some of those issues persist.
There were temptations and opportunities to sell the stock and invest in something less volatile. During the eight years I've owned the stock, it's price has dropped more than 25% on eight separate occasions, and three of those times by more than 40%. But I believed then, as I do now, that investing in quality companies and holding them over the long term is still the best and surest path to investing success.
That patience has paid off -- I'm now up over 1,000% on my initial MercadoLibre position. But I haven't simply stared at those returns, I've continued to build my position, even as the stock has climbed because I believe the company is still in a great spot to benefit from the tailwinds I saw eight years ago.
Is the stock still a buy?
MercadoLibre is still growing. Year-over-year growth in the most recent quarter saw user growth north of 20%, items sold grew 39%, and growth in payment transactions exceeded 60%. Financial results also impressed, as revenue grew 74% over the prior-year quarter to $274 million, and net income grew 60% year over year to $48.5 million.
For all of that tremendous growth, risks remain. The stock currently trades at more than 83 times trailing earnings, but that drops to a slightly more reasonable 59 times forward earnings for the coming year. Still, any sign of trouble in paradise, and investors will likely sell first and ask questions later. Also, the aforementioned political and economic risks could rear their ugly heads, or the headwinds of exchange rates could return.
All of that said, I still believe MercadoLibre has set the stage for impressive growth for years to come. I'm still an investor, and my money is where my mouth is -- MercadoLibre represents 8% of my portfolio.