In this episode of Industry Focus: Tech, Dylan Lewis is joined by Danny Vena for an in-depth look at Mercado Libre (NASDAQ:MELI). This is the go-to company for e-commerce in South America, and with e-commerce accounting for less than 3% of total retail in the region, it has tremendous opportunity in front of it.

We take a look at its operations and phenomenal growth and how it is positioned to grow in the future.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 21, 2020.

Dylan Lewis: It's Friday, Feb. 21st, and we're checking in on Mercado Libre. I'm your host Dylan Lewis. I'm joined by Fool.com's Danny Vena. Danny, how's it going? It's been a little while.

Danny Vena: It has been a while. It's going good, how's it going for you?

Lewis: No complaints. I'm sure that you're just living it up and having a very wonderful San Diego day right now.

Vena: [laughs] You know the weather outside is about 75 and sunny.

Lewis: [laughs] It's never frightful in San Diego, the weather outside. It's been OK, it's been mild over here; so, I can't really complain. It has been excellent conditions if you're Mercado Libre. This is a company that has been absolutely on fire over the last year or so. You are the expert on Mercado Libre. I think you are the chief evangelist of Mercado Libre here at The Motley Fool. You've been covering the stock for such a long time. For the folks that are not familiar, this is, kind of the Amazon, eBay, PayPal, Craigslist -- insert whatever fintech-type thing you want to throw in there -- of South America. They do a lot and they do it well. So, I'm happy to have you on today's show.

Vena: Well, thank you. I actually bought into Mercado Libre, probably about 11 years ago and I've been banging the table for the company ever since.

Lewis: [laughs] Safe to say that you're sitting on some pretty big gains.

Vena: That is safe to say. In fact, in my retirement portfolio, it's become my second- or third-largest position.

Lewis: [laughs] I'm sitting on some gains as well, mostly because you told me to buy the stock a couple of years ago and I started doing some homework. Very happy. I'm not sitting on your kind of gains, but I am sitting on some big gains. And even people that have bought over the last year or so are sitting on some sizable gains for this company.

We're going to start out now with some of the recent earnings results they reported just over a week ago. So, we have an updated look at the numbers, and it seems like the growth story for this company is just continuing.

Vena: It is. I'll just take a look at some numbers here; so, revenue was $674 million, up 57% year-over-year, which is phenomenal growth. Now, there was a net loss of $54 million, which came out to about $1.11 a share, which was more than what Wall Street was predicting. That was the result of a lot of investments that Mercado Libre's management has been making in sales and marketing, particularly, in the marketing arena they've had a huge ad campaign that was supposed to let consumers know -- the ones that don't know, let them know that the company exists and it's out there.

Lewis: And there are already quite a few that do. I think [there are] over 300 million registered users on their e-commerce platform. And that point you made right there about management, kind of, signposting that this is going to be happening, that we're going to be getting some more marketing spend coming, is exactly why you got to dig into the commentary from management, get a sense of what's actually going on with the business beyond the core numbers.

We spend a lot of time with this company talking about how they are in a lot of different countries -- I think, over a dozen different countries -- and they are -- 18 different countries. [laughs] So, a dozen-and-a-half different countries. And many of them with local currencies. So, you have a business that is taking all these local currencies, trying to make it all into one nice tidy number for us to make sense of. And there is some messiness that comes with that. So, we look at, both, what we see in terms of dollars, but we really focus on some of the core business metrics with this company as well.

Vena: That's true. You know from an operational standpoint, if you're just looking to get away from some of the translation issues from the foreign currency exchange rate issues, there are several operational metrics you can look at. As you mentioned earlier, confirmed registered users, that metric is up 20% year-over-year; the number of unique buyers is up 27% compared to this time last year; the number of items sold is up 28%; and their shipping business Mercado Envios is also booming. The number of items shipped last quarter increased 49% year-over-year.

Lewis: I almost was going to say, "Those are impressive growth rates for a mature company," but you can't even call this a mature company. They're mature, in the sense, they have this platform with hundreds of millions of users and they're putting up some really impressive growth on top of that. The reality is, they are so early in the land grab for e-commerce, for really being kind of the go-to destination for most things commerce. And one of the easiest ways you can really see that is if you look over at their Mercado Pago product. We just highlighted some numbers that a little bit more about their classic e-commerce business. The payments business for this company is getting big really fast.

Vena: Yeah, it is. And just for listeners who may not be familiar with this, back a dozen years or so ago when a portion of Mercado Libre was owned by eBay, at the same time that eBay owned PayPal, they modeled Mercado Pago after PayPal. Now, it bears noting, there's a lot of people in Latin America that don't have a bank account, don't have credit cards -- it's mostly a cash-based society -- as a result of that, in order to get people to buy things on their e-commerce site, they set up Mercado Pago and they worked it out so that they have a network of places, like, convenience stores, where people can go in, they can turn in some cash, have that cash transferred to their Mercado Pago account and then they can use it like a credit card.

Lewis: Yeah. And that's a huge, huge offering for an area that is so largely unbanked. And it was something that was kind of built out of necessity, like you said before, it's really more of something that was -- we're trying to build this e-commerce platform, we're trying to build an online marketplace and we need people to be able to transact in that marketplace. It turns out, though, that once you build the ability for people to make digital payments, they're going to use it for things that are not just specific to the platform that you've built.

Vena: Well, it started out just as a payment method that was used on Mercado Libre's platform on their website where people could conduct e-commerce transactions. It became so popular, in fact, that other digital sellers started coming to them and say, "Hey, we'd like to accept Mercado Pago on our website." And from there it got to be so huge. Mercado Libre's management had the foresight to say, "Well, let's see if some of the off-platform merchants, some of the brick-and-mortar and physical retailers want to use this as a payment method?" And from there, it just exploded.

Lewis: It's really amazing. If you look at the numbers for the most recent quarter, total payment volume -- so, basically what they are allowing to be processed -- up to $8.7 billion, up 64% year-over-year. And that would be impressive enough, but you mentioned that off-platform, that's about half of that payment volume right now, up over 100% year-over-year and even more in local currencies. I think what they may be accidentally stumbled on to is a much larger growth lever than they probably originally imagined.

Vena: I'm sure that that's true. Their payment transactions are up 127% year-over-year. The total payment volume, that you mentioned, that's up 99% year-over-year in local currencies. The off-platform, that's up to $4.7 billion out of $8.7 billion, and that's up 176% year-over-year.

Lewis: And it's brilliant, it really is. They've been so smart in creating this online payment space. And they've done a lot of other really interesting things to help expand the scope of the network that they're creating. You know one of the things that I am most impressed with is the pivot that they've been able to make to that mobile point-of-sale. And so the idea with the mobile point-of-sale is, you're connected with Mercado Pago, you're able to hop in and make payments, but think of mobile point-of-sale as kind of like a Square reader or a credit card accepter that immediately takes what probably otherwise would be a cash transaction and puts it on this network.

Vena: That's right. And amazingly they took a cue from Square, they went out and they had these readers made specifically for their audience or bought one off the shelf that was just custom for what their users needed and began selling them at cost. So, now they're drawing people into the ecosystem and more and more merchants are accepting Mercado Pago as a payment method, more and more customers are using it and it's just a virtual cycle that's going to continue. And honestly it was brilliant what they did.

Lewis: And the growth rate, again, staggering: point-of-sale total payment volume up 126% year-over-year. It's hard to find a part of this business that you don't like. There are just so many things that are going in the right direction. And we've talked a little bit before about how they've been able to look at very successful models with U.S. companies and then adopt them. There's also been interest from some of those U.S. companies; there's a little bit of a symbiotic relationship there.

Vena: There is. If you go back to March of last year, after the eBay and PayPal split, PayPal went out on their own, they've been doing a phenomenal business. PayPal went and sought out Mercado Libre and said, "We want to invest in your business, we want to invest in your growth." So, in conjunction with an equity issue that they did and some private funding that they got from outside -- PayPal, $750 million equity investment into Mercado Libre. So, from one of the premier fintech companies, one of the most successful digital payment processors, that was a huge vote of confidence.

Lewis: And another stock that's done incredibly well, too -- we'll add that to the list of description for PayPal. What I think I'm most struck by with Mercado Libre is, the growth has been incredible and it would be really easy to say at this point, how long can they keep this going, really? I mean, we're looking at triple-digit growth rates year-over-year in so many of these different segments. Surely, things are going to slow down a little bit, Danny. The reality is, no, I think there's still a lot of greenfield ahead of them.

Vena: If you would go back and look at Amazon a decade ago and say, "There's no way it can grow anymore," similar mindset here. The population in Latin America is about 642 million people. So, it's nearly twice the population of the U.S. But at the same time, their e-commerce transactions only represent less than 3% of total retail in the region. Now, if you compare that to the United States, we're at about 11%. So, the number of transactions can triple just based on the e-commerce business, and then they have twice the population that's in the U.S. So, you're already talking multiple opportunities for growth right there, and that's even if their business itself didn't grow, if they just roped in more people that were already there.

But then, once people get on the platform and they start transacting business, they use Mercado Pago for payments, they use Mercado Envios for shipping, then what they find is that the net promoter scores -- which is how likely a customer is to recommend this business to a friend -- they skyrocket. And so, I really can't say enough about not only how successful this company has already been, but how successful, I think, it will continue to be for years to come.

Lewis: I think that this is really a case of the network effect in full swing. This is a company that, everything they roll in, it continues to make the offering stronger and stronger and all of these different services just reinforce the strength of the overall offering. It's so much easier to use Mercado Libre if you're on Mercado Pago. If you're looking to make payments, "Hey, Mercado Pago is there," maybe that's the entryway for some people and then they discover this awesome e-commerce platform as well.

Vena: There are so many different ways into the platform, whether you decide to use their mobile wallet, you use their shipping, you use the payments, you buy things on the platform, there are so many people on the platform now transacting business that a number of large retailers are coming to them and say, "Hey, we want to be on your platform now, we want to set up a store on the Mercado Libre platform because that's where everybody is."

Lewis: So, I think a lot of folks who are a little bit more familiar with this company might realize that so much of what we see today is truly the vision of CEO, Marcos Galperin, right? This is someone who, I think, saw e-commerce early, saw digital payments early, saw the early success that was happening here in the United States, decided that this was something to bring to other markets and did a great job with it. There are probably some folks that got a little bit of a scare last week when they were reading news, particularly, if they were a reader of the Buenos Aires Times, because there was a news piece that came out that their CEO -- and longtime CEO-Founder -- was stepping down from the company.

Vena: And as is so often the case, you know, you can't really trust what you hear at first glance, you need to dig into the details a little bit. And it turns out that he was stepping down as the Head of the Mercado Libre platform in Argentina, so he's not going to manage that local platform anymore, somebody else is going to manage that local platform in Argentina and he's going to focus more on his CEO duties. Unfortunately, some of the folks misunderstood or google didn't translate well or any number of miscommunications could have happened, but what the story was being spread was that he was actually stepping down as CEO of Mercado Libre, which turned out not to be true.

Lewis: Yeah, I think my heart skipped a beat there for a second [laughs] as a shareholder of this company, because he's done such a great job. And it was only compounded by the fact that I saw this one news item about it and it was literally the only English news result about the topic, all the other ones were in Spanish and so I was, like, frantically using Google Translate trying to understand what these Spanish-language sites were saying, in English. Finally, I just had to turn to folks who knew a little bit more about this company and they directed me to you, because you had reached out to their investor relations team to get the skinny.

Vena: I did. I actually have a longtime correspondence going with their investor relations department, having asked them a number of questions over the last decade. And when I reached out to Federico Sandler, who is the Head of their Investor Relations department, he said, this is a restructuring of authorities of our local subsidiaries in Argentina picked up by the local press and poorly communicated, this is something we do in the ordinary course of business and implies no changes to the management of the corporation. So, to be clear, Marcos Galperin remains the CEO and Pedro Arnt, the CFO. And again, that's courtesy of Federico Sandler, Head of the Investor Relations department of Mercado Libre.

Lewis: I'm glad you were able to talk me in, and probably a couple of other people, off the ledge there, Danny. You know, when you have a management team that has been so successful for such a long time, they become such an important part of the story for the stock, because, you know, just because they've grown to be a company that is worth tens of billions of dollars, doesn't mean they can't keep growing, but it would be a lot harder without him at the helm.

Vena: I think we were all kind of glad that Marcos is going to continue helming the ship there. It's been so successful, and I have high hopes for it to have even greater success, so I'm glad that he's sticking around.

Lewis: And I'm certainly of the opinion that while it has gone on an incredible run, I think in 2019, it was up about 90%; to-date in 2020, it's up over 20%. It would be easy to look at that and say, "You know, the gains have been had with the stock," I don't think that's the case. We talk about the e-commerce penetration rate and it is so low. We look at what's going on in terms of the number of users they have and it's still a fraction of the overall market in many of the countries that they operate in, and then they have all these other services that they can roll in as well. It just seems like there are so many different ways for this business to continue to grow. And it will probably be several times larger than it currently is another five or ten years from now.

Vena: I'm certainly banking on that; I'm not selling a single one of my Mercado Libre shares.

Lewis: [laughs] Yeah. And this is -- we've talked about in the past -- but, because of the Forex hits that this company will face, there can be some crazy lumpiness to their results. And, you know, it's one, if you're going to buy, worth buying into over time, because depending on what's going on with some of these local economies, there can be some real issues with what they report on the top- and bottom-line, and that can give you a really good access point, if you're looking to buy shares.

Vena: Well. And it's also worth noting that this company is not without risk. We're dealing with Latin America. And you can look through the last several years, there have been political scandals, there's been hyperinflation in some countries, there's been political dissidents, there's been corruption, there are a number of things when you're dealing with so many different countries. And you mentioned the foreign currency exchange rate, you know, sometimes that can have a huge impact on, if you just look at the U.S. dollar numbers, because of Securities and Exchange Commission rules, they have to bring the foreign currency rates and translate those to dollars for the financial reports. That doesn't necessarily mean that that's what the growth rate is, because it helps looking at those growth rates in the local currencies.

Lewis: We say this often with companies -- I think it's particularly true for this one -- it's OK to buy small and buy often. When you have a company that's exposed to this many risks and this many different local economies, it's OK to work into that position over time. And just as a case-in-point for that, between August 2019 and November 2019, stock was down almost 30%; you go from November 2019 to present, up about 50%. And so, you don't want your cost basis tied to any one point in time with any company, but you certainly don't with one like this.

Vena: Well, and this is certainly a poster child for buying the stock, getting to know it and understand it, because this stock is so volatile that there are a lot of opportunities to buy it at a cheaper price. Now, that said, it can also run. And as you've said, I mean, over the last year the stock's up 100%, so people who would have bought and said, "Oh, there's not much more that this ... " or didn't buy because there's not much more the stock can go, were surprised, "Oh, I'm waiting for it to drop." Well, that drop never came.

Lewis: [laughs] That's why it's good to have some cash on the sidelines, you know, you can drop that in any time that you see shares of stocks that you want to buy at a little bit of a discount. Always nice to have a watchlist, always nice to have a little bit of cash to make sure that you can act on that watchlist when those moments come.

Vena: You know, it's the hallmark of a seasoned investor you're talking about there, Dylan.

Lewis: [laughs] Yeah. Well, when you're starting out, Danny, you know, you might only have $500 or $1,000. It's hard to do a lot with $500 or $1,000 -- even with the advent of fractional shares and everything like that -- so, I understand the temptation, but once you start getting that base, you know, you can leave a little bit on the side and be opportunistic.

Thank you so much for --

Vena: I certainly have.

Lewis: We have to be, right, I mean we have to be. Thank you so much for hopping on today's show, Danny. Always a pleasure to talk with you, and talk Mercado Libre, in particular.

Vena: The pleasure is all mine, Dylan, and I'll be happy to come back.

Lewis: [laughs] All right. Listeners, before we wrap, just a quick favor I'm going to ask -- if you've been listening to some of the other shows over the past week-and-a-half, you might have heard this already -- we're taking a quick survey of our listeners and I'd love it if you could participate. Helps us get a better sense of who is listening to the show. And no matter how long you've been a listener or how frequently you listen, it's a quick, easy and anonymous thing that you can do to help us out and help us when we're talking to advertisers about supporting the show. There's a listener survey link down in the description of this episode, you can click it there and then find all the information you need. Thanks in advance for helping us make that happen.

Otherwise, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey!" shoot us an email IndustryFocus@fool.com or tweet us @MFIndustryFocus. If you want more stuff, subscribe on iTunes or wherever you get your podcasts.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Austin Morgan for all his work behind the glass today. For Danny Vena, I'm Dylan Lewis, thanks for listening and Fool on!