What! A! Quarter!

In this episode of Market Foolery, Chris Hill chats with Motley Fool analyst Jim Gillies about the latest headlines and earnings reports from Wall Street. They've got a Latin American e-commerce monster hitting all-time highs, and they also go through the results of an automotive giant and, finally, an unstoppable legal monopoly.

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This video was recorded on November 5th, 2020.

Chris Hill: It's Thursday, November 5th. Welcome to Market Foolery. I'm Chris Hill. With me today is Mr. Jim Gillies. Good to see you.

Jim Gillies: Good to be seen, Chris.

Hill: We've got some automotive news we're going to get to, we've got some social networking news we're going to get to. We're going to start with the monster that is MercadoLibre (MELI -0.45%), the Latin American e-commerce and fintech company.

Second-quarter profits and revenues solidly higher than expected. In fact, revenue up basically 150% [laughs] from a year ago. And MercadoPago, which is their digital payment system, is just on fire.

Gillies: Yes. When I wrote my notes this morning, I'm on another screen here, Chris, I did three words, three sentences, because each word required its own exclamation point, and that's essentially "What! A! Quarter!" This is a monster, probably the best earnings report I've seen this quarter.

Yes, gross merchandise volume, which is where it all starts with these types of companies, the amount of goods, the value of the goods that goes through their networks: up 62% in U.S. dollar terms. And they were very clear about specifying there's a U.S. dollar term, and then there's foreign exchange neutral. So basically in the localized currencies.

The U.S. dollar had a strong quarter against Latin American currencies. So I'm going to, in an effort to downplay how great this quarter was, I'm going to only quote the U.S. dollar-denominated one. So gross merchandise volume: almost $6 billion U.S. dollars. That's up 62% year over year. Revenues, how much they got, how much MercadoLibre gets to take of, the GMV: $1.1 billion, up 85% year over year as measured in U.S. dollars.

Mobile, mobile gross merchandise volume as a percent of total: 70%. And it was up over 280%. Total payment volume, you mentioned, MercadoPago, $14.5 billion, up 92% year over year. Total active users for the quarter: up 92% to over 76 million people. Items sold: up 110% to 206 million items shipped: up to 188 million, which is up 131%. Year-over-year free cash flow: $766 million versus $272 in the first three quarters of last year. In fact, for this quarter, free cash flow -- the cash that MercadoLibre gets to keep to dispense with as they choose -- nearly $300 million for the quarter, which is more than the first three quarters of last year combined. It is a ridiculous earnings report.

And one wonders what happens. [laughs] There will be a currency at some point where the U.S. dollar will underperform Latin American currencies. So I'm kind of wondering what's going to happen in that quarter; it might actually look better. But this is -- and I'm a shareholder, and I'm a happy shareholder today.

Hill: All shareholders are happy today. [laughs]

Gillies: Oh, all shareholders are happy, yeah. I mean, I'm going to blame this one on David Gardner, years ago, and his Rule Breakers team, who said, "Hey, you guys should buy this." And I said, "I'll throw a little bit of money into it." That little bit of money is no longer a little bit of money. So David, thank you.

They only fly in the ointment, because I always have to have a fly in the ointment for companies. In fact, I asked a colleague of ours this morning as he was shooting me details on another company that had a great quarter. I said, "What is the one thing you hate about this company?" Because I think it's valuable to always find the problems, because if you can assess the problems and if the problems are fixable, you probably find something as opposed to, oh, this could really derail the ship at some point.

My biggest problem for MercadoLibre is it's not a cheap company. It's a $65 billion market cap. That's 19 times sales. That is pricey. But [laughs] that said, with the growth that they just put out this quarter, with the results they have, you know what, that type of growth forgives a lot of sins like 19 times sales. And I think a few more like this and we'll be laughing at this price, so.

Hill: And you just touched on the thing that I wanted to hit on, which is, it is a sign of how good this quarter was for MercadoLibre that the stock is up 7%. It's hitting another all-time high. Because this is not a cheap stock. And we've seen this earnings season, we've seen some stocks in this category -- and what I mean by that is, coming into today, MercadoLibre has doubled in 2020, more than doubled, so it's not a cheap stock. We've seen other businesses in that category, where it's like, well, you know, they had a great quarter, the stock is flat or the stock is down a couple of percent. It was a great quarter, but it's like, oh, this is a valuation thing. If they had any kind of stumble, we wouldn't be looking at a 7% gain. And again, this speaks to [laughs] just how great this quarter was for them.

Gillies: Yeah, I mean the best, I call this, by so far, the best quarter I've seen this earnings report, or this earnings season. The prior holder of that unofficial title would've been Shopify, who had another monster quarter. And it was exactly what you've just said. Their stock, I think, was down 6% or 7% on earnings release date, because they didn't match the expectations that the market had for them. In this case, MercadoLibre just torched every expectation; and good for them, but it's pretty crazy.

Hill: Shares of General Motors (GM 1.20%) not hitting an all-time high, but they're moving higher this morning. And the story of GM's third-quarter report is pretty simple: trucks and SUVs. They sold a bunch of them. [laughs]

Gillies: And they hope to sell more, exactly. I guess we're going from the sublime to the boring. And look, that's not pejorative. I am someone who thinks boring is beautiful when it comes to investing. Revenues, I think, were about $35.5 billion, which is no growth year over year, but the way the accounting worked, earnings per share of $2.83 was way above expectations, nearly double, or if it wasn't almost double, 65% up year over year. Made a ton of free cash flow, about $9 billion, I think, year to date. And yet, today, this is a $36 stock, and 10 years ago, this was a $34 stock.

And that's I think the one tale before we get into trucks and SUVs, the one tale I want to tell is, you know, this quarter, Chris, looked good. But take the camera and pan out. I mentioned, 10 years, the stock has gone nowhere essentially. In 2010, so a decade ago, GM had $135 billion in revenue, and they're on pace in 2020, they're on pace this year to turn in about $120 billion in revenues.

So meh, [laughs] you know, it's kind of like, there's a reason this stock has gone nowhere. And like I said earlier with MercadoLibre, growth forgives a lot of sins, but no growth, which is essentially what GM has had -- negative growth, if you will -- that just compounds the sins. But you know, it was a good quarter in that history, so we'll give them credit for the day at least.

Hill: Absolutely. And depending on when you bought shares of this, I mean, we've seen this story with a bunch of other businesses in other industries where, hey, if you go back to the spring, you know, sort of the depths of the spring, there were investors who looked at GM and said, well, that's just ridiculous that it's trading at $14 a share, come on!

Gillies: Yeah, you've done well.

Hill: You know. And it's like, congratulations, you're sitting on a double, and then some. But you know, this has been the story with GM for a while, that they need to be able to string a bunch of these quarters together, and they just haven't done that.

Gillies: And that is the key, because I am not a shareholder of GM, I have very little interest in being a shareholder of GM, even though I think it's relatively cheap here. I have no interest, similarly, in selling my shares of MercadoLibre, because MercadoLibre has been stringing these quarters together, as you say, and GM, just kind of like, well, you know, this is a good quarter, but it'll be followed by a crap quarter, I'm sure, and maybe a middle-of-the-road quarter after that, then maybe another good quarter.

The one thing I think I'm really the most interested in from the quarter is they are really hitting hard on their all-electric future. And I like that. You mentioned earlier that the strength of this quarter was trucks and SUVs. I am a big electric-vehicle fan, and I think that the electric-vehicle revolution cannot get here swift enough, and so I like the fact that everyone and their dog is bringing out multiple models of electric vehicles from the small, everyday commuter cars to large vehicles. Like, GM has recast the Hummer brand as an electric super-truck, and unlike other electric pickups I could mention who have their windows break when you glance at them, I think this one is going to be a big hit for them. I think there are people who are going to line up for this vehicle.

And you know, I think, as an environmentally themed guy -- you know, my background is environmental engineering -- I love that they've taken a brand that among the environmental set is not thought of terribly well, put it that way, that is the Hummer, and they're recasting it as an electric super-truck. So I love that. But they are going for, across the board, more electric vehicles, small versus large, they're standardizing models around various drive units, they're going hard into this.

And they're not the only one. VW, Volkswagen, is doing the same. Toyota is going along more the fuel-cell electric vehicle style, but also, they've kind of got mastered the plug-in hybrid versions. So I mean, it's looking really good if you are a fan of electric vehicles and if you're a fan of the environmental benefits of electric vehicles. I love where the auto industry is going, but it's not enough to make me buy the stock. [laughs]

Hill: Death cannot stop true love; all it can do is delay it for a while. And the corollary in investing is that the pandemic cannot stop dating or short-term companionship, as evidenced by Match Group's third quarter report. Tinder subscribers up 16% from a year ago, and shares of Match Group up more than 5% today and hitting another all-time high.

Gillies: So if we were to call this a trio of earning reports, we've kind of got a Goldilocks. We've, kind of, got the too hot, the too cold, now we got the just-right one with Match. Dating in a pandemic, a.k.a., don't underestimate human desire for connection.

It's a pretty great report. Lesser growth than MercadoLibre, but also more longer-term sustainable growth, unlike our friend GM. Revenue up 18%; average revenue per user up about 4%. Subscriber count up about 12%.

They essentially own online dating in the 21st century, in 2020 and beyond. They have a great suite of legacy brands, so you're talking a Plenty of Fish, OkCupid, where I met my significant other a number of years ago. Of course, the "now" brand is Tinder. And I mean, you know, "swipe right, swipe left, swipe right" has entered the lexicon. I mean, we know what we're talking about. The only time I've personally been on Tinder is when a friend of ours decided that it would be funny if she let us make some choices for her. She thought it was less funny after the fact. [laughs] But it was pretty funny, actually.

And they have the kind of the new brands coming out, or these things -- the one app I think I find the most interesting is Hinge. It bills itself as the app, it's a relationship app, it bills itself to be deleted. So you mentioned maybe the short-term connection. I'm not too sure how you phrased it, again, but you know, which is --

Hill: Short-term companionship.

Gillies: Short term. Thank you. Yeah, that's a Tinder specialty.

Hill: Isn't that what Tinder is, short-term companionship?

Gillies: Yes. But Hinge is, you know, they're designed to be deleted. That's pretty cool actually. Because we always talk about businesses, you can have recurring revenues and what have you. In the business of companionship or love or whatever you're going to call it, you know, a lot of people would like to not be repeat customers. I'm not looking forward to being a repeat customer. I'm quite happy to never use their product again for myself. So you know, I think that that's a really interesting and unique way of approaching it with Hinge; and of course, they bought Hinge.

I think that they've, kind of, got all the way down the dating spectrum or how they're going to handle these things. They have an offering for everyone. And you look at them, and it's hard to see who could supplant them.

And then my favorite aspect of this quarter or year to date, I suppose, is that quarterly revenue was about $640 million, year to date they're at about $1.74 billion. Year to date they've generated $486.5 million in free cash flow. Compared to that $1.74 billion in revenue, that's a 28% conversion rate. So $0.28 of every $1 that they raise as revenue, stays in their pockets to do with as they will. Twenty-eight percent is spectacular, and it's spectacular for a company that has no peer, no one is going to supplant them.

Hill: What are we all looking for? Well, to the point you made in terms of companionship, eh, we're looking for different things, some people are happy to be single, some people are looking to settle down. What are we looking for as investors? I think we're all looking for the same thing. And what I mean by that is, we would all love to invest in legal monopolies -- not illegal monopolies that are getting put under the microscope by the Justice Department. Legal monopolies.

And to your point, Match Group owns dating in the 21st century. Who is their competition? And they are a $35 billion company. They're not some monstrosity that is going to get the attention of the Justice Department, like, we better break them up. It's like, no, they're a legal monopoly.

Gillies: I mean, you've got Facebook dating. I know people who have met because they follow the same people on Twitter. But even if Facebook dating became a thing -- and it's a thing -- it's a small portion of Facebook's revenue and their operations. I mean, how dedicated is Facebook going to be willing to follow there?

Match, it's a tragic story for me a little bit, Chris, because it's been one I've looked at for, like, at least five years. And especially, both when it was under its prior parent, IAC, and now as a stand-alone company. Always looked at it and said, "You know, I should really get to know this one. I should buy a few shares, I should really, you know" -- and I've always said, eh! The valuation looks expensive.

And just I've missed it, I've never owned it, I wish I had, it's a great story. I probably should go buy [laughs] a few shares for myself just to partake, because yeah, it's a legal monopoly, and I don't see anybody supplanting them anytime soon. Which means the good results we had here, the just-right quarter, to use the Goldilocks metaphor I trotted out earlier, the just-right quarter probably is going to be just right for a good long time.

Hill: You own shares of MercadoLibre, so there's only so much sympathy you're going to get from me in terms of --

Gillies: Oh, I deserve zero sympathy, trust me. Zero.

Hill: [laughs] Jim Gillies, always good talking to you, thanks for being here.

Gillies: Thanks for inviting me.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.