[PODCAST] The Magic of MercadoLibre (Ticker: MELI)
Why solving hard problems can widen your moat
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Today, we published an interview (links above) with Brian Stoffel of Long Term Mindset on MercadoLibre stock.
We dive deep into MercadoLibre’s sprawling business operations, what has made it successful, and what the future may look like. Listen to the full interview to see why it has grown revenue at a 47% (!) annual clip since 2015.
I want to specifically talk about MercadoLibre’s widening moat.
As Brian discusses, the countries that MercadoLibre operates in — Mexico, Argentina, Brazil — have much more disorganized infrastructure than the United States.
Delivery services are weak or nonexistent. Addresses are scattered, hard to find, and might be up a winding road. You don’t have many (or zero) interstate highways. A ton of the citizens were totally unbanked before smartphones.
This is a problem if you want to quickly grow an e-commerce platform. Amazon did not have to deal with these issues in North America.
However, counterintuitively, these problems have turned into a huge opportunity for MercadoLibre. And it has helped it widen its moat and fend off international competition like Amazon.
It inspired the company to build its fintech services. MercadoPago and other payment tools are not only viable businesses on their own but build a seamless bridge to enable more shoppers to buy on the MercadoLibre marketplace.
A scattered and disorganized address system is hard to manage. However, if you are the one company furthest along in climbing this mountain, you can attain an advantage vs. any upstart competitor. If you are the one company that has worked tirelessly to offer vertically integrated fast delivery in spite of a disjointed transportation system, that can be an advantage vs. the competition.
A more difficult starting position incentivized MercadoLibre to build MercadoPago and its vertically integrated fulfillment network. Today, its ecosystem of products has taken these difficult problems and turned them into an advantage. Think of it from a customer perspective. If MercadoLibre is the only e-commerce platform that can reliably ship you items quickly (and integrates with your personal fintech app) then why would you shop anywhere else?
These issues also highlight how MeradoLibre has a longer runway for growth. E-commerce penetration in Latin America is generally around half of North America and East Asia. In general, I think most people prefer to shop online if given a convenient solution. An optimist would say it is likely that these countries can get wealthy enough over the next 20 - 30 years to help close this gap. MercadoLibre stands to benefit from this long-term tailwind as it is much earlier in the e-commerce transition than Amazon, Coupang, Alibaba, etc.
According to our friends at Finchat.io, MercadoLibre trades at an EV/EBIT of 40.
I would not be a buyer of MELI stock today. However, I completely understand why this has entered the never sell camp, why it is a David Gardner/Motley Fool favorite, and why you should be confident in sustained revenue growth for years to come.
-Brett