I'm Buying More MELI Stock - Here's Why The Market's Wrong

Marcato Libre stock is down 12.4% right now after the company reported its earnings last night and it is right near its 52- week lows. So, I think it's fair to say that the market was not too impressed with Marcato Librey's earnings results. However, if you have been following this stock for the past couple of years, then this was another report like the ones that we have had for the past year or so where Marcato Libre is very clearly sacrificing short-term margins to compound and grow the topline of the business and capture more market share. This is a company that is very comfortable to sacrifice short-term margins and profits to reinvest back into the growth of the business and that is what they have done once again. However, as we have seen this earning season, if you do not report an absolutely stellar result, then your stock will get nuked, especially since the S&P 500 is down 4% on the day right now. That is adding to the downside pressure for Marcato Libre. However, I have added to my position. And in today's video, I want to explain why as a long-term shareholder, I continue to believe that this business is cheap and actually doing the right things that will grow shareholder value over the long term. So, I do think that this is going to be a little bit longer of a video because I really want to dive into the earnings results and explain why I chose to buy more shares today. So, with that being said, let's now hop into it and get started with our Daniel Prong slideshow. All right, so let's start off from the top in their shareholder letter and we can see that revenues were up 45% and up 41% on an FX neutral basis. Operating income was 676 million with a 6.3% margin. Earnings were $448 million with a 4.2% margin. Then we can see total payment volume was $ 109 billion in the quarter, up 53% year-over-year. and gross merchandise volume was 23 billion, up 38% year-over-year. So, the business is continuing to grow by almost 40% across every metric, but the margins are still being compressed as they reinvest in this growth. Then, further down in their shareholder letter, Marcato Libre said that Brazil, which is their largest market, is delivering the strongest results. And this is important because it shows Marcato Libre is winning in its most important and mature market. and it is continuing to compound rapidly at scale. Melly then shares that it has gained market share in each of its three largest markets. Their buyers are purchasing more often and fintech users are using Marcato Pago even more. However, operating income was down 6% on a year-over-year basis despite the revenue growing by 45%. They then say that engagement is deepening across every metric though. They are investing part of today's margins and profits to accelerate the shift of commerce and financial services and it is working. Continuing on through the shareholder letter, they wrote, "Growth remain elevated in our largest markets and buyers now make 12 purchases per year against 50 in developed markets. This means that existing customers can still grow gross merchandise volume and e-commerce revenues by about 4x over time even if Marcato Libre does not acquire any new customers assuming that the Latin America market eventually gets in line with the more developed markets like the US. They then show that fintech users are transacting more as well with total payment volume per user up 34%. Again, this is on a per user basis and it's growing at 34% which shows that users are using Marcato Pago a lot more. Ecosmic users grew 33% year-over-year and faster than any other segment. These are users who both shop on the e-commerce platform and use the fintech platform. And Marcato Libre says that ecosystemic users generate 70% more gross merchandise volume than only marketplace users and have 90% more transaction payment volume than only fintech users. And ultimately their average revenue per user is three to four times higher. This is why getting people to become both fintech and e-commerce users is so important. And it's great to see that these types of users are growing 33%. It also shows how having both the e-commerce and fintech platforms are a moat that strengthens each business. Also, Melly shares that it gets a ton of data from these users, which is powering their advertising and credit businesses. They then shared this chart that shows their cost per shipment is declining. This means that their e-commerce and logistic platforms are getting more efficient and this is why they're passing on free shipping to customers because they are able to pass on more savings. This is very good to see and it shows that their investments are also working as intended. This slide comes from their new investor presentation and it shows that they're continuing to grow faster than the overall Latin America e-commerce market which means that they are continuing to take market share. Unique active buyers are also up 22% year-over-year to 93.9 million people. They added 17 million buyers year-over-year and Brazil is still accounting for the largest gains here. And again, Brazil is their most mature market, and it's where they're seeing the most growth come from. However, gross merchandise volume and items sold in Mexico did decelerate pretty hard, down from 42% growth to 25% growth and 34% to 21%. Brazil remains strong, though, and is actually accelerating, but Mexico is currently weakening. Overall, this led to a slight deceleration year-over-year in their metrics, but still very strong growth. Items sold per unique active buyer is up 12% to 9.2. In Brazil, they say that this metric grew 16% year-over-year as well. So, buyers are using Marcato Libre more, which is exactly what they want to see. Getting back to their shareholder letter, they then share that advertising revenues grew 51% year-over-year and 58% on an FX neutral basis, which is well ahead of the market and means that Marcato Libre is taking market share. Argentina and Mexico had slower advertising growth though, but the business still grew by over 50% despite this. They then say that their AI advisor now manages campaigns for 56,000 sellers, which is helping more businesses adopt and manage their advertising. Marcato Libre then shares that they now have 11% of the digital ads revenue in Latin America, up from only 2% in 2020, and their digital advertising business is growing four times as fast as the overall market, which is how they're gaining so much market share. Ricotta Libre then shares that they are now the third largest digital ads business in the region and they gained 3.1 percentage points of market share year-over-year whereas their top competitors actually lost market share. This is very very good as advertising is an incredibly profitable business for them. Moving on to fintech services, they say that they now have 93 million monthly active users and that number is up 29% year-over-year. Melly then shares that it is the largest digital bank in Mexico now by active user count with more than 18 million in the country and growing by 40% year-over-year. In Argentina, 80% of the population is now an active Marcato Pago user which is absolutely insane. In Brazil, Marcato Libre is still growing monthly active users at 35% year-over-year, faster than any other player in the country at scale. They say that asset quality in their lending portfolio is remaining robust with the 50 to 90day non-performing loans at 7% and stable despite industry-wide weakness in Argentina and Brazil. So, Marcato Libre is seeing nearrecord low non-performing loan losses while the overall market is experiencing elevated losses. And this is at the same time as they have grown their credit book by 62% year-over-year, which is pretty incredible. They do also say that the credit card remains their largest investment and that is where the majority of profits are being reinvested to continue growing their credit card portfolio and issuing more cards throughout the region. Here you can see that the monthly active users in fintech again reached 93 million and are up 29% year-over-year. What's important here though is that growth isn't decelerating at scale and Marcato Libre added 5 million fintech users on a quarter-over-arter basis. Assets under management are up 67% year-over-year. And these are people saving and investing more with Marcato Pago. So people are moving more of their assets to Mellie's fintech platforms. I mean think about it. If fintech users are up 29% but AUM is up 67% then that means that on a per user basis they are transferring more of their assets into Melly. The credit portfolio is also up 62% year-over-year and credit cards continue to make up more of the portfolio. now sitting at 47% of the total loan book. This is putting pressure on margins in the short term as Melly has to set aside provisions against loans upfront. So when loans grow faster than overall revenue, it is a headwind on margin. Overall though, their net interest margin after losses was steady on a quarter-over-quarter basis and at 20.1%. But it is still down from 21% last year, and I don't think the market liked this. Over time though, I am expecting this metric to grow once again, especially as the newer credit card cohorts mature, and they are not investing so aggressively to grow their credit card portfolio. This next screenshot shows us that the 50 to 90day non-performing loans are still low at only 7%, which is good to see. However, the over 90-day non-performing loans are uptrending to about 19.3%. Last quarter, Marcato Libre shared that this cohort isn't an important metric and it is more noisy. This is because if they slow down new credit growth, which they currently are on a percentage terms, then the older non-performing loans grow as a percentage of the overall loan book naturally because there's not as many new loans coming in to dilute them. So, if you have less new loans coming in, then the old non-performing loans make up a higher percent. Overall, the short-term NPLs are the most important metric here, at least in my opinion. Also, Melly has an over 100% provisions ratio for its NPLs and 140% provision rates on their 90-day bucket. This means that Marcato Libre has already set aside the cash to absorb all of these losses and these losses have already been written off. I also make this chart and update it every quarter with Marcato Libre and I've been tracking the non-performing loans since they started reporting them all the way back in the fourth quarter of 2021. And you can see that the 15 to 90day NPLs are in fact low and near the historical lows, which is quite impressive again considering that their loan book grew by over 60% year-over-year. The 90-day bucket is uptrending though, which is something to watch and pay attention to, but the new loans that they are writing are remaining healthy. Melly then ends its shareholder letter saying that Latin America is seeing the fastest e-commerce penetration growth since 2020 and twice the pace of 2019. As more of the economy moves online, Marcato Libre's goal is to make sure that more of it moves through their ecosystem. And I agree. Growth is remaining strong, engagement is deepening, their cost to serve is falling. And they say that margins will improve in the future as investments start to mature. The structural drivers of profitability though, which are lower cost of shipping, operating leverage, credit portfolio profitability are all improving, which means that the overall underlying profits of the business are actually going up. They are just reinvesting those profits to continue capturing more growth and improving the business. And as a long-term shareholder, this is what I want them to do. Moving on, this next screenshot shows us a table of all of their different businesses and economies and their year-over-year growth rates in US dollars. You can see that Brazil accelerated to 50% year-over-year revenue growth. Mexico also accelerated to 47% but Argentina decelerated to 27%. Commerce overall accelerated to 47%. Fintech decelerated to 42, but both are still growing very strong. And overall, Marcato Libre accelerated to 45% year-over-year growth. Gross merchandise volume also accelerated to 38% and total payment volume also accelerated across the board. And I think that this suggests that their investments are paying off because almost every business in every economy is accelerating still even at scale. All right, now we are going to do a little bit of a chart speedrun from Stock Unlock. So, right here we can see that fintech monthly active users are continuing to grow strong and hit new all-time highs, and they also grew by 5 million on a quarter-over-arter basis. Gross merchandise volume continued to scale well and hit new all-time highs. Marcato Libre also shared that their fulfillment capacity grew 20% just this quarter ahead of the holiday rush. So I think that the fourth quarter could be very strong as this new fulfillment capacity comes online. The number of total items sold also continues to grow and the same thing applies. I think that the fourth quarter is going to be very good for Marcato Libre's business with this metric. Marcato Libre had 109 billion of total payment volume which was a new all-time high and does continue to grow. Users are using Marcato Pago more for their purchases. As we saw, same and next day shipments are also continuing to make new highs. And you can see that this metric is also accelerating and scaling quick. This shows that their investments in logistics are paying off and deepening the moat because there's not many businesses in Latin America that can do same and next day online shipping. Marcato Librey's credit portfolio continues to scale fast as well. And as I said earlier, this is where a lot of the profits of the business are being reinvested and their credit portfolio is sitting at $18 billion now. Marcato Libre's fintech revenue is also up to 17 billion in the trailing 12 months now, which makes it almost as large as New Bank. I mean, think about that. Marcato Libre basically has an entire New Bank within its own business. Then it also has the e-commerce platform and the advertising platform. But still, this is very impressive fintech growth. Then lastly, here we can see that Brazil revenue is also accelerating and grew 50% year-over-year despite it being Marcato Librey's largest market and doing $20 billion in trailing 12 months revenue. Now, in my opinion, this shows just how large the opportunity is in Latin America because Marcato Librey's largest market is still scaling and growing at 50%. This suggests that Mexico still has a long way to go and Marcato Libre is still very early. Now, I also read through the conference call and this is a highlight that I want to bring up because one of the big worries with Marcato Libre recently has been the political landscape in Brazil and in the conference call they said how Marcato Libre has been operating in Brazil for 27 years through different governments. The opportunities of e-commerce, fintech, and the digitization of the entire economy are stronger than any political leader and they believe that they will continue to grow and that this is quite literally a non-factor for their business. Now, as always, I like to do a summary of my videos with a summary slide. So, here is what I have to say about the earnings overall. Marcato Libre is still growing by over 40% year-over-year, even on an FX neutral basis. Users are growing on both the e-commerce and fintech platforms. Transactions and savings per user are also growing. The amount of items purchased per user is growing. Cost of shipping is declining and the cost to service on fintech is remaining at $1 per user. Engagement and usage is deepening across Marcato Libre's ecosystem while the cost of serve is actually declining. This means that the business is realizing operational leverage. You just can't see it in the reported metrics because they are reinvesting. so aggressively into the business. Marcato Libre also increased its shipping capacity by 20% just this quarter ahead of the holiday season which I think could lead to Q4 being quite a strong quarter specifically for their e-commerce business. Brazil is also accelerating and growing at 50% despite it being Marcato Libre's largest market. Marcato Libre also has the largest digital bank in Mexico and it is still very very early in that market. There is quite literally decades of compounding left here. Credit non-performing loans are remaining healthy despite the macro incor markets weakening and competitors seeing elevated losses. Advertising continues to take market share and grow over 50% despite headwinds in Mexico and Argentina. And this is a very profitable business for Marcato Libre. The political landscape is short-term noise and does not impact the business or its thesis long term. They've grown through multiple leaders and it's the same leader who was actually just reelected. So the recent sell-off to both New Bank and Marcato Libre I think is just not justified there. However, Marcato Libre is continuing to sacrifice its margins today to capture growth and market share and deepen the moat of the business. I think the underlying profits and business strength are growing and strengthening but the price is moving in the wrong direction. And ultimately, I think that this is making Marcato Libre stock look even more like a long-term buy for me. And I have bought more shares in the market today after the sell-off. So overall, I continue to believe that the market is focusing on the short-term profits and margins of this business. But I really think that investors in Marcato Libre have got to be thinking for the long term. And I'm talking 5, 10, 15, and 20 years because I genuinely want to be able to hold this business for the coming decades because I believe that the opportunity in Latin America as that economy continues to digitize is freaking massive. And Marcato Libre seems to be the leader of these new industries, they're bringing a lot of people online. And I think that this is going to continue. I mean, think about it. Even in their largest market, Brazil, they're growing revenue by 50% year-over-year still. This means that there is still a lot of compounding and room to continue growing even in Brazil because if they were starting to saturate the market, then we should see revenue start to decelerate, but it is still accelerating on that upward trend. And ultimately, I think that Mexico is going to be another huge market for Marcato Libre and follow the same steps that have happened in Brazil. the thing that the market is worried about and the thing that makes the market uncomfortable. Well, the the main thing, there's a few things, but the main thing is that you're not seeing the profits today. Analysts want to know when are the profits and margins going to start expanding again because quite literally on a year-over-year basis, the operating income of Marcato Libre is now declining. And that that puts people and analysts in an uncomfortable position because you really do have to have faith that the investments they're making back into the business are growing the underlying profits and creating shareholder value over the longer term. And what I have noticed is just the market is getting a lot more short-term focused. And here's a good example. After the Democrats won the House and the Senate the other day, the hyperscalers were up something like 5 to 6%. And the reason the hyperscalers were up is because the market is saying that the AI buildout is going to slow down which means that their capex should also slow down and their profits should grow more in the short term. That is why those stocks were rewarded in the market because the market thought that short-term profits were coming back. But as a long-term shareholder, I actually want Amazon to continue investing as aggressively as they can in the short term if it is going to create more long-term free cash flow and profits for shareholders because that is how shareholder value is created over the long term. So think about that. The market rewarded Amazon and the hyperscalers because it thought that they were going to slow down spending that is creating long-term shareholder value because it's going to make more profits today. Marcato Libre is in the opposite position. Well, it's actually still in the same position as the hyperscalers, but the market's not viewing it that way because Marcato Libre is very willing to sacrifice its margins and profits today to continue investing in the growth of the business. Then, as a shareholder, I ask myself, do I think those investments are paying off? And the fact that their business is still accelerating even though it's doing almost 40 billion in annual revenue now and it's still growing by over 40% year-over-year. I think that's a pretty clear argument that the the investments are paying off and it's able to grow the top line. Then their users are growing. They're still capturing more fintech users. They're capturing more e-commerce users. Then their engagement is also deepening. Fintech users are using their platforms more and buyers are are buying on the platform more and their cost to serve is coming down which means that their business is actually getting more efficient over time and then they're taking those profits. They're investing it into product and development. They did spend a little bit more on sales and marketing this quarter. And then they're also using a significant amount of their operating leverage to continue growing their credit portfolio because growing their credit portfolio is ultimately what gets people to buy on the e-commerce platform and gets them more entrenched in Marcato Libre's ecosystem. They recently said that if you can get a user on their credit card, then they start shopping more. They start using the fintech platform more. They start getting more data. Advertising gets better. So, the credit card is like a gateway, a gateway, uh, you know what I want to say, a gateway into Marcato Libre's business. That's why they're investing so aggressively in it. And in addition to that, their loan portfolio losses are still at record lows or near record lows while their economies that they operate in are struggling and seeing headwinds, which suggests that their underwriting on their credit is very good. So, when I put all of that together, I think that Marcato Libre's investments are actually paying off, and this thing is continuing to grow its underlying profits. I mean, think about it. I just did a conversation with Drew that we're going to post on our channels here soon. Drew is a fantastic guy. He's a freaking smart man. But I just finished recording a podcast with him, like literally an hour ago. And here's what I in the podcast, here's what I said. Marcott Libé basically has a new bank within it. As I said earlier, New Bank has around 20% profit margins right now today and it's doing about $4 billion in profits on an annual basis now. Okay. So, if Marcato Libre's fintech cost to serve is in line with New Bank and they're producing about the same amount of revenue as New Bank, then Marcato Libres's fintech business probably has around 20% profit margins as well. In reality, they're just reinvesting back into it, right? But that business is probably producing around 4 billion in annual profits right now. The advertising business is doing $2.2 billion in trailing 12 months revenue now. And it's said to have an 80% operating margin. So 80% operating margin can probably turn into a 50% net margin. Which means the advertising business is probably doing a billion in profits as well. That means the overall business through fintech and advertising is doing about 5 billion in cash flow today right now. Then in addition to that, they have their massive e-commerce platform. Now, honestly, I don't think the e-commerce platform is probably that profitable with high margins. So, if you slap a 5% margin on the e-commerce platform, then you still get around a billion dollars in annual profits, which is a pretty low margin for an e-commerce platform. That means that Marcato Libre just on that basis could probably be doing around $6 billion in profits right now today on a trailing 12 months basis. at a $76 billion market cap. That means that it's trading for what 13 times profit potential. That's the thing that you have to understand as a shareholder. You're not going to see the profits today and they're just not going to be there because they're taking those profits and reinvesting it. But long-term, they want to optimize the free cash flow of the business like Amazon wants to. So, it comes down to you have to believe in the long-term potential of the business. You have to believe in the investments that these guys are making. And you just have to ignore the noise. I don't care that Mercota Libre is down 12% today. It's uh well before today I think it was around a 8% position in my portfolio if I'm remembering correctly. I don't care. I don't care that it's down 12% today. I bought some more shares today. The short-term volatility just it it just doesn't matter when you think long term because when I look back on this stock in 2031, 5 years from now, I strongly believe it's not going to be 1,500 bucks. I think the business's revenue is going to be multiple times higher. I think it's still going to be growing over 20% per year and there's just no way it's it's still at 1,500 bucks. I think that this thing over the long term, especially once they decide to optimize margins and slow down investments, the profits are going to explode. It's just that the market is so short-term focused that if if profits are not exploding right now, then your stock gets nuked, especially with the sentiment and the way the market operates today. So, I'm not at all surprised that the stock is down. But, as a long-term investor who believes that the amount of this business is actually increasing and the underlying profitability of it is increasing as well, I think that it is extremely cheap from a long-term perspective. That doesn't mean I think the stock is going to go up next month. It doesn't mean I think it's going to go up in 3 months, 6 months, or even next year. I have no freaking clue. But when I think about where Marcato Libre's business is going to be in 5 to 10 years, it's going to be massive. All right? It is going to be massive. This business has so many tailwinds behind it, and it is doing an incredible job. So, that's what it comes down to. I'm a long-term investor. If you guys, you guys should know that by now. I don't try and time the market. I'm terrible at timing the market. I mean, just take a look at road today. But what I think I'm good at is identifying value and focusing on the long term. And when I look at Marcato Libre over the long term, I think that there is a tremendous amount of value in its in its market cap and valuation today. So, with that being said, that is going to wrap up my rambling. And what a freaking day in the market, man. Wow. There is so much that I have to report on that I don't think I'm going to sleep for like 72 hours. I'm getting so many messages about road. I'm getting so many messages about app loving. I'm working on it, guys. It just takes time and uh I'm going to do my best to get everything out as as quickly as possible. But with all that being said, that's going to wrap up today's video. Thank you so much for tuning in. As always, I truly do appreciate it and I hope to see you again in my next