 Good day, fellow investors. A company that I had a lot of requests to analyze is Mercado Libre, the South American Amazon. As I'm looking now at potential investments in Argentina, one of the Argentinian companies related to Brazil but whole South America is Mercado Libre. So in this video, I will explain the company, give an overview, then explain the investment thesis behind it, what are the key factors to watch, why is the stock price so volatile, what impacts it, then give it a potentially my added value, I think a long-term perspective on the stock and on the risk reward. If the stock goes up 20-50% up and down, that can happen anytime in a very short period of time. We'll discuss that in the risk part. However, the key there is to look long-term and then see how that long-term fits your portfolio. So let's start with this investment. Mercado Libre hosts the largest online commerce and payments ecosystem in Latin America. So we have Alibaba, China, Amazon, the States, Europe, very differentiated and we have Latin America and there you have one leader, the first mover advantage, everything is there, we have Mercado Libre. So we can easily call it the Amazon of South America. What are they doing as they have a lot of users, they are optimizing that by adding payment systems, shipping systems, whatever they can do to leverage the ecosystem they have built. And the ecosystem is pretty big, 211 million registered users, 33.7 million unique buyers in the period, constant grow and revenue grow of 65.5% year over year. Those are huge numbers and even revenue growth is bigger than Amazon's so a lot of potential in this company. However, as it is the Amazon of South America, the company decided to risk it and go for market domination because it included free shipping a while ago. This increased costs but should improve market share, market strength and increase the mode because as we said it is the first mover there. However, the net profits are declining because of that EBITDA also and that's something the market never likes even if it's good for the long term and that's why you can see the decline in the price amidst emerging market turmoil here going from above 400 to below 300 in 2018. Additionally, the stock fell because of the falling Brazilian real, both Mexican and Argentinian pesos, revenues, Amazon concerns but more about that later. Focusing on the growth in Brazil that is staggering, 68% growth in the last quarter and constant above 60% growth is really amazing. In Mexico things are even better, we are looking at 100% growth over the last three quarters so that's crazy. Others also start growing fast, Chile and Colombia have been picking up pace and also reaching 83 and 68% growth in number of items sold. Those are crazy numbers. When you have such growth rates nothing else really matters, it's the same as with Amazon and they can simply introduce new products to leverage on what they have, Mercado Pago, Mercado Livre, Mercado Credito, etc, etc to build on that ecosystem. That's the investment thesis, that's the bullish thesis. The Latin American market has still huge potential to grow, is growing very fast and perhaps Mercado Libre can be like Amazon. 10 years ago the stock price was 37, now it is 1813. That's a huge return because it's very difficult to estimate what will happen with Mercado Libre in the next 10 years as it was very difficult to estimate what will happen with Amazon from 2008 till today. If we could have modeled it as analysts in 2008 then Amazon's stock price would have been at 500 in 2008, perhaps also already at 1000 because nobody really saw what happened or they were overwhelmed by the risk of what Amazon did not happening. So similarly with Melly we have to look at the risk reward and from a long-term perspective, but before that let's look at the concerns. As they introduced free shipping and a loyalty program in Brazil, their gross margins were hit from 62% from positive earnings, we went to 50% which is still good, but that didn't lead to positive net incomes which were very high at 18% last year, now they are at negative 4%. So the psychology of our investors is highly skewed to stocks with positive earnings and that's why this didn't reflect positively on what the market and analysts think about it. Further in May there was a tracking strike in Brazil and we have to see how will that affect Q2 results that will come out in August. If that there is a strong effect on Mercado Libre and lower growth numbers or no growth numbers then you will see a big big drop in the stock. If that is not felt in the numbers as it is diversified Mexico, Argentina and all other countries then you will see a huge boost with the stock price as with any other growth stock. If I look at the search trends on Brazilian Google we can see that in that period when there was the tracking strike the search was really lower but if I compare it seasonally there was a similar situation last year in that period. Further currency issues don't help however as always with currencies and emerging markets something that sometimes they help sometimes they don't and we can see here the Mexican Peso over the last three months it went from 18 for $1 to 21 and now it's back to 19 so a lot of volatility there and that's always something you have to expect. Inflation rates are a bit higher there so a little bit of devaluation has to be counted in but that will again increase revenues. Another concern is Amazon they are planning to enter Mexico enter Brazil with more weight but is there place for more players in the fast growing Latin American online market probably there is will they squeeze some margins probably but as said it's impossible for us analysts to model this in the long term because there are so many moving parts and you really don't know what the companies can do and how will the market react to that so the key is to put these things into perspective and we I have three questions that help with that will Mercado Libre be there in 10 years yes because they have a great business model like Amazon when I sell my book on Amazon you the buyer buys it immediately I get my money between 45 and 60 days after so Amazon keeps the money for 60 days that is a negative working capital model they get the cash they're financed by those who sell their products on their platforms so they don't need cash as long as they can cover previous purchases with new purchases they have a lot of cash to invest to grow to develop to gain market share to increase the marketing to make free shipping etc etc so as online will be there in 10 years I think also Mercado Libre will be there in 10 years and as said the next question will it be able to grow I think online we are buying more and more online I hate going to the shops retail you just buy you compare the prices which is okay online will grow but questionable how will the margins evolve because you can buy all over the world online now so that will be that's a highly highly competitive environment but online will grow so will probably Mercado and this leads me to the third question will it ever be profitable for the long-term and sustainable and that's the question that I think scared a lot of people when analyzing Amazon five ten twenty years ago and we'll keep putting off people that are looking at companies like Mercado Libre now Amazon Alibaba or whatever I live in the Netherlands which is a saturated online market and the largest store is bolt.com which is a subsidiary of Aholt the biggest supermarket chain in the Netherlands they collaborate retail omnichanneling is extremely strong but the online subsidiary still has smaller margins than the big retail brick and mortar supermarket so the margins there are really tough to compete and whenever I go online to buy something I simply look at the cheapest and I buy from one of the five six seven ten providers that provide things so very very tough environment I don't know what will happen in the future there so the 100 correct forecast is as always JP Morgan when asked what the stock market will do it will fluctuate so will Mercado Libre's stock and back to the stock in the last 12 months it was below 250 high above 400 below 300 and now it's at 327 from a fundamental perspective earnings were really growing extremely well up to 2016 that's why the stock price was also exploding but then 2017 came in and the results weren't as good as they were because the changes in strategy and going for market share last 12 months there is even a loss per share however cash flows are still positive not as positive as they have been but are still positive so the key here is growth if the company continues to grow at 50 60 percent and let's say improves a little bit those margins from this new strategy then the stock will explode again because people will have a positive attitude towards it if an Amazon can grow but Mercado Libre can grow at the same time again and then we see PE ratios of 100 200 based on future promises so with this stock it is all about sentiment if the growth slows down if there is no way for the company to compete to get margins to pay the extremely high shipping costs in Latin America then the stock will hurt as said the expected continued e-commerce growth in Latin America is huge at 19 percent so if that happens to Mercado Libre and the market cap grows at 19 percent per year we will see a market cap of 85 billion in 10 years that's a four-bagger in 10 years really possible if net margins improve it will be a 10-bagger in 10 years that's extremely possible if we look at the option chain 2020 call options strikes strike price 340 i have to pay about 22 23 percent of the current stock price to own that with Tesla similarly i have to pay what 76 for the strike price of 320 so again 23 percent if i look at the nasdaq option chain i have to pay about 21 on the 175 strike price so that's 12 percent so the market the option market categorizes Mercado Libre at the same volatility risk as tesla and that's something you have to take into account when investing in Mercado Libre if the earnings disappoint in august the share and there are there is trouble in emerging markets depreciating currencies whatever then you will see it drop if it beats expectations you will see it spike up extremely fast and that's the risk reward you have to see how it fits your portfolio and your personal risk reward appetite but the key here is to watch the long term the how will this risk reward the volatility that everybody focuses on on the short term develop over the next three five ten years if you can invest on that perspective but keeping in mind that you can lose 50 60 70 percent of your current investment keeping in mind that this is a sentiment investment okay can mercado libre work on the trend on the growth trend to keep the sentiment towards the stock high so that people are willing to pay price earnings ratio of 100 150 250 for a longer time as long as the growth allows that so you have to see okay am i going to invest in a sentiment stock like mercado libre i'm a value investor i prefer to invest in value earnings that i can forecast and the earnings yield gives me the returns that's why i'll stay away from mercado libre will not invest because simply it's not the kind of person i am if i would see mercado libre's earnings per share go to 30 i don't know in three four years then i would buy it at this price because i know then that it would give me a 10 15 percent return from the earnings as that is pretty unlikely it will take a long time for mercado libre perhaps 10 years to get there but it is possible so it's not really my style but i think i explained and you see if it fits your portfolio or not there is nobody that knows what will happen in that environment not even jeff bezos not even the CEO of mercado libre it's all a risk reward play highly volatile the good thing is that the upside is unlimited and the downside is always limited you can only lose what you invest in if you don't do leverage and all that other kind of stuff to conclude i finish with a quote from buffet the truth is i've watched amazon from the start and i think what jeff bezos has done is something close to a miracle and the problem is if i think something is going to be a miracle i tend not to bet on it so that's what buffet said when invest when seeing looking amazon and similarly to mercado libre what will happen what will it need to become a great investment over the next 10 15 years is always a miracle competition margins whatever and so you have to see it is possible see how that fits the risk reward and that's it unfortunately i have no magical formula for it have no magical insights as nobody has so compare the bull thesis compare the bear thesis and then see how that fits you that's the only answer with mercado libre thank you for watching looking forward to a comment and i'll see you in the next video