Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Shares of MercadoLibre (MELI 1.38%) are hopping 3% higher in early Wednesday trading after "the Latin American eBay" (EBAY -0.55%) received an endorsement from San Francisco-based stockbroker BTIG last night.
Initiating coverage with a buy rating and a price target of $395 a share, BTIG's recommendation promises new buyers of MercadoLibre stock as much as a 20% profit from today's price. (MercadoLibre pays a dividend, too -- but worth less than 0.1% per share, it doesn't really factor much into the valuation.) Still, with the broader S&P 500 up less than 6% over the past year, 20% is quite a bit more than most investors have been enjoying lately, which could make this latest pick out of BTIG worth a look.
Here's what you need to know.
¿Por que el BTIG ama MercadoLibre?
Unprofitable over the past 12 reported months, and with free cash flow of only $130 million, MercadoLibre sells for 114 times cash profits today -- which seems pretty pricey given that over the next five years, S&P Global Market Intelligence see MercadoLibre growing earnings at only about 26% annually. This makes it difficult to argue that MercadoLibre stock is undervalued based on today's price -- so BTIG takes an unusual tack in making its case.
Rather than argue MercadoLibre's merits per se, BTIG draws investors' attention to an analogous example -- the relationship between eBay and PayPal (PYPL -0.88%).
"We are optimistic on [MercadoLibre's MercadoPago] payments platform," writes BTIG in a note covered by StreetInsider.com (subscription required) yesterday. MercadoPago, argues the analyst, has "tangible parallels to Paypal," which "is now ~4x the value of the parent marketplace" eBay. "While we acknowledge competitive concerns on the e-commerce side, investors should focus on the end game: an e-commerce/fintech ecosystem spanning most facets of LatAm digital life. Just a few players will likely accrue the majority of share and MELI is well-positioned to be one of them."
Caveats and provisos
Now just to be 100% clear, eBay didn't actually invent PayPal. (That was Elon Musk.) Instead, eBay bought PayPal in 2002 for $1.5 billion, shortly after PayPal went public -- then spun it back off into the public markets in 2015.
Still, BTIG's broader point is correct. Today, the eBay that once owned PayPal and used it to facilitate payments on its shopping platform commands a market capitalization just over $27 billion (and falling, down 20% over the past year). In contrast, the PayPal that eBay spun off sells for nearly $100 billion -- and is up 12.5% over the past year.
PayPal has indeed outgrown its "parent marketplace" quite handily.
So how does this lesson from two American companies apply to South America's MercadoLibre?
MercadoLibre has been in business nearly 20 years now. It launched its MercadoPago payment facilitation service in 2003 (in Argentina), and has been steadily rolling it out in more and more countries since. Although MercadoLibre does not break out the financial results for MercadoPago in its financial statements (at least not as regards the division's contributions to overall sales and earnings), it's nonetheless clear that MercadoPago is integral to the company's success.
In its most recent 10-K filing with the SEC, for example, MercadoLibre mentions MercadoPago no fewer than 213 separate times, and notes that 82% of all transactions on MercadoLibre's platform used MercadoPago for payment (up from 70% one year ago). Moreover, the gross merchandise volume of transactions using MercadoPago grew 71% year over year in 2017. This was faster than both overall revenue growth (66%) and income growth (which was actually negative that year).
Given these relative growth dynamics, it's easy to see how MercadoPago could over time grow to eclipse the marketplace business that it was created to service. Could MercadoPago grow to become "4x the value of the parent marketplace," as happened with PayPal and eBay? Perhaps.
If and when it does, it's even possible that paying 114 times free cash flow to acquire MercadoLibre stock could turn out to be a bargain.