r/valueinvesting
Thoughts on MELI stock and the Multiple?
Author questions MELI's high 40x forward PE despite margin compression, citing currency, competition, and credit risks.
- High revenue growth rate of 49% year over year.
- Strong 5-year revenue CAGR of 46%.
- Aggressive reinvestment into the business for future expansion.
- Significant margin compression from 13% to 6.9% YoY despite revenue growth.
- High forward PE of 40 and flat stock price over 5 years despite massive revenue growth.
- Exposed to currency, intense competition, and subprime credit risks.
Just wondering what are everyone’s thoughts on this stock and the price that it is trading at. I understand that the growth rates are very high (49% year over year), but the margins also compressed significantly (from 13% to 6.9% year over year). So essentially, they brought in much more revenue but took home less money. I am just wondering why is there so much hype around this stock that is trading at a forward PE of 40? I thought international stocks were supposed to trade at lower multiples. I understand that the company is investing a lot of money back into the business, but there are also currency risks, competition risks (Amazon, SEA limited, Shopee) and credit risks (being a fintech and taking subprime loans). I was looking into possible stocks to add to my portfolio and this one fits the bill because I have no international exposure, but just wanted to understand what makes this company so special and worth the high multiple. I also see the stock has been flat over the last 5 years while growing revenue about a 46% CAGR.
Incredible growth and LatAm is the fastest growing ecommerce region in the world. E-commerce is a pretty darn good business model. People like buying shit and convenience, if you can get people to subscribe to a premium membership it's a powerful flywheel.
It's not cheap, but it's the cheapest it's ever been. Same w/ Sea Limited in S.E. Asia and now Brazil.
Valid concern but you have to look beyond the surface a bit.
Margin compression has three causes. And I will let you decide whether these are structural problems or not.
- They are adding and expanding first party e-commerce business, and up until the most recent I believe it is loss making.
- They are lowering free shipping threshold. They are quite likely the only one in the region that can it with scale because SE and Amazon do not have a comparable logistics network there.
This third point also goes into your doubt about credit risk. MELI’s provision for loss is 25-30%. For your reference consumer default rate in Asian country during the 1997 Asian financial crisis is at around 40%. What this means is that, if latam performs similarly like Asia (another emerging market) did in one of the most violent financial crisis, MELI would take an additional 2 billion in loss and, with 20% NIMAL, this essentially means that their fintech arm would break even for the year. (Excluding corporate expenses ofc.) This is certainly a risk, but it is hard to think it is anything existential
So the loan portfolio basically brings in more cash but lowers the margins. What I don’t understand is how the stock is flat over the last 5 years? You look at the chart and it’s up 12% in 5 years with a 46% CAGR growth (dead money). The opportunity cost of that trend continuing worries me.
The way loan works is that you have to estimate default and write it as lost when you originate the loan, but interest income only comes later. Basically, for every dollar they lend, they already “lost” (by gaap standards) 25-30cents as soon as the money leaves their hand, but the 30% interest only gets recorded a year later.
Stock price does what it does. But 2021 is just a weird time for valuation across the board.
Meli is one of the most undervalue stock at this prices. Looking ttm valuation numbers is not investing...
Great, that’s what I came here for. Can you explain your thesis on how it is undervalued?
First, my advice if you are going to invest in individual companies, you need to understand the business, margins, growth, stability of the growth and companies investment cycle.
Since it will be too long (as it should be when analyzing companies). Tl dr:
Meli margins compression is completely temporary and company is doing it on purpose and is working (Revenue growth is accelerating and probably will stay like that for a while). Once the strategy isn't working anymore, company can go back to healthy margins of 15-20% and boost the eps incredible fast while maintaining organic growth on double digits but at that point EPS could be even 5x times of current EPS based on the company growth and margins coming back to normalize numbers.
Based on current projections if they stop investing aggressively in 3 years and lift back net margins to 15% and assuming 30 P/E (less than what they have now) stock price could do a 3-4x
I am well aware. That’s why I posted on here to gauge if the company was worth doing a deep dive into. What is the spend on? 3 years seems like a lot of time to keep spending and compress margins. Where did you get that timeline?
I like the company but i only own Microsoft, so i won't be responsible for any crash
Sorry Microsoft shareholders
This sub likes it so you better stay away