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MercadoLibre vs. Sea Limited: Which Is More Financially Antifragile?

By Brian Withers and Brian Stoffel - Mar 25, 2021 at 7:11AM

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It's about more than just cash on the balance sheet.

MercadoLibre (MELI -9.99%) and Sea Limited have been tremendous stocks to own over the past few years. As consumers turned to online shopping during the pandemic, these regional e-commerce players seen tremendous growth. But what would happen if the global economy takes a turn for the worse? On a Fool Live episode recorded on March 12, Fool contributors Brian Stoffel and Brian Withers discuss the importance of financial fortitude and which company is positioned better to handle an extended economic recession.

Brian Withers: Brian, I'm going to kick it over to you. We're going to go through financial fortitude, and this is one of your favorites. Can you explain what we mean when we say financial fortitude?

Brian Stoffel: Yeah. When I mean financial fortitude, what I really mean is, I want to know if there was a crisis that happened that we can't see coming like, I don't know, maybe a year ago. With the company's financial position, make it so that it got weaker and maybe died. I call that fragile. Would it stay the same? I call that robust. Or could it actually get stronger because of tough times? I call that antifragile.

Now, how can a company get stronger when things go wrong? There's three ways. One, if they have a strong financial position, they can buy back their own shares at a discount. That's one way. Another way is that they can acquire rivals, especially startups, at a discounted price, so that's another way. The third way is they could just price the competition under the table.

What does that mean? Well, if I've got a million dollars and I know I can drive Brian out of the market by selling my, let's say, coffee at a loss -- why would you want to sell your coffee at a loss? Well, maybe I lose a dollar for every bag I sell and I sell 2,000 bags, so I lost $2,000. But I've got a million dollars, so who cares? Because when Brian has to declare bankruptcy, that leaves the whole market for me. It's a little Machiavellian, but it's worth looking at, because this is where you're putting your money.

So I just pulled up the three things that I look for when I'm looking at financial fortitude. I pulled them up and I just wanted to share where both companies are in this respect. This is MercadoLibre. Now here, I'm going to explain. This blue line right here. That's the amount of cash and investments they have over time, and you can see that through successful business, but also through raising funds, they're sitting on about $4 billion in cash and investments. This red line, long-term debt, has not grown nearly as much, so their net cash position is incredibly strong.

But here's the other thing. Their free cash flow is growing quite quickly. In fact, over the past year, they brought in more free cash flow than they have in long-term debt in general. That's where MercadoLibre is at. For me, that's very antifragile. We can flex our financial muscles if hard times hit.

Now let's look at Sea Limited, which is a little bit more difficult. Again, the blue line is their cash position. They've been very wise about taking advantage of their share price and, being able to raise funds because it's gone up so much. They've got more cash. They're at about $7.5 billion. Their debt is also higher. But here's the thing -- free cash flow has been negative for the last three years. We don't actually know what their free cash flow was over the past year, and the reason for that is because they are a foreign company and their free-cash-flow statement only goes out when they list their annual report. They have reported fourth-quarter earnings, but in their presentations, in their conference call, they didn't actually tell us what their free cash flow was so we still have to wait. I'm sure it'll be just a week, or maybe two at the most till we find out.

But the bottom line for me is, and I'll just give my winner on this, would be MercadoLibre because they have such this strong cash position, but even more so because they have very strong free cash flows and they've had positive free cash flows for a number of years, whereas Sea Limited is just teetering on that right now. I know they've got a lot of investments left to do too if they want to conquer this e-commerce fulfillment business too. Brian, what do you think of that?

Brian Withers: Yeah, that's a great perspective. The cash position for Sea Limited is certainly a strong one, and if I was looking at a SaaS company, or certainly somebody that's funding growth, that you want a lot of cash. I don't worry too much about debt, but there is another cash flow metric that I like to look at called cash from operations, and it's similar to free cash flow but it really just looks at the day-to-day operations of the company and the blocking and tackling business without any financial stuff in it.

Let me show you what that one looks like.

Brian Stoffel: To be clear, for people out there who might not know the difference, free cash flow takes out capital expenditures and, other times, nonrepeating big purchases. Like if I bought a new car, that would be a capital expenditure, whereas cash from operations is just how much money you put in your pocket but you don't count that car purchase in there.

Brian Withers: Yeah. This is the ongoing business, and you can see, even though both companies had about $4 billion of revenue last year, MercadoLibre has almost twice as much cash from operations as Sea Limited does. In general, I wouldn't worry about that it's half, but if you're trying to pick a winner and you're forced between the two, what I see here is MercadoLibre is what I might call much more dialed in and their business model is more mature. This is an area that I want to watch for Sea Limited, and I would hope that over time they would catch up, but it's a little bit where the history for MercadoLibre helped them and they are really just in a different phase.

I'm with you, Brian. I'm going with MercadoLibre for financial fortitude.

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Stocks Mentioned

Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
$696.95 (-9.99%) $-77.35
Sea Limited Stock Quote
Sea Limited
$71.11 (-7.94%) $-6.13

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