Chit Chat Stocks - The Magic of MercadoLibre With Brian Stoffel (Ticker: MELI)

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Starting point is 00:01:28 Now, please enjoy this episode. Welcome to Chit Chat Stocks. Today, we have the pleasure of being joined by Brian Stoffel. He has been a long-term writer for The Motley Fool, and he is a co-founder of Long-Term mindset where he currently runs the Stock Investing Mentor Program. Today, we are talking about MercadoLibre, a fast-growing, exciting company based, I believe, in Argentina, if I'm getting that right. I guess before we get into everything, Brian, welcome to the show. I believe this is the first time having you on. So welcome to Chitchat Stocks. Well, Ryan and Brett, thank you guys so much for having me yeah this is the first time i know uh my partner brian froldy's

Starting point is 00:02:21 he's been on a bunch but uh i i'm happy to be here and and talk about a company i i believe out of all the stocks i own this is the one i've owned for the second longest all right that's a good that's uh gotta be good for your portfolio because the returns have been fantastic i think it's been a hundred beggar it's one of those that at least for the motley fool and other investors out there has been one that has routine spiffy pops for people that know that term on its earning releases. But let's start at the beginning. How were you introduced to MercadoLibre and what interested you about the company? Sure. So how I was introduced, you'd have to go all the way back to, I don't know if you guys remember, there was a global gains newsletter at The Motley Fool.

Starting point is 00:03:11 um and it does not exist anymore it was run by a gentleman named tim hansen it just so happens that uh i was a middle school writing teacher in washington dc before i started writing for the motley fool um and our guidance counselor was tim hansen's wife and so he was the guy that was just showing up at our school happy hours and i was like huh who is this guy and then i saw that He had a newsletter and I was just starting to get interested in stocks. This is back in, to put this in a time frame, this is back in about 2009, 2008. So a long time ago. And that was when I was introduced to MercadoLibre.

Starting point is 00:03:54 I did not buy it, but it was one of their recommendations. In 2010, I moved to Costa Rica with my wife. We still live part of the year there. It's been 15 years. and just getting to know central america we had traveled in south america um just seeing how amazon wasn't there uh walmart is kind of there not really um got me really interested and then 2013 is when i first bought and to be honest with you what it really came down to at that point in time was i looked and it was like it was like an eight billion dollar company and to put that in

Starting point is 00:04:32 perspective. I mean, I could be wrong. Someone might fat check me, but it was tiny. And I was like, my goodness, this is really small for a company that's growing the way that they are and has an opportunity the way that they do. And so, yeah, I've owned shares for 12 years now. Unfortunately, I did almost all my buying back in 2013. And I only just say unfortunately, because it wouldn't have been a bad idea to continue adding as time went on. But it is my second largest holding. So I do know a lot about the company. Yeah, and you mentioned that big opportunity that they had in 2013.

Starting point is 00:05:13 And it seems like if we look back over the last decade, they've seized that opportunity for the most part. So why don't we go through a little bit of the history of MercadoLibre and maybe sort of the bones or the skeleton of its business model, and then we'll dig into the parts a little deeper. Sure. So I like to think of it as a company that has evolved in ways that are similar to Amazon,

Starting point is 00:05:36 which is, I think it's a fair analogy, where they started out with e-commerce. And so it was all about making a marketplace where people could buy and sell things. And when it started, I would argue that it was actually more eBay than it was Amazon, just kind of like a marketplace that listed things.

Starting point is 00:05:55 They didn't necessarily focus a ton way back in the beginning on fulfillment and selling first party goods, having warehouses set up all over, dealing with getting things from the merchant to the warehouse, the warehouse to the last mile so that it ends up on your door. That wasn't a huge focus at the very beginning, but I think being able to look up north and see how Amazon was developing, they saw, and their founder, Marco Scalapin, had lived in the United States, and so he was familiar with what was going on, and they saw that that was what was needed. And that's really important because setting up those fulfillment centers, setting up the logistics chain, that is really hard. You're talking about building things that cost tens of billions of dollars spread out across a continent. You're talking about hiring thousands, tens of thousands of people. You're talking about managing that workforce. People don't want to do that unless they've got a really good incentive to do it. And once it's set up, there's even less incentive for someone to challenge.

Starting point is 00:07:06 So they were starting to get into that when I first invested in them. And they have been, I would argue, quite successful with that. And what's important is that you have to realize that 10 years ago, huge percentages of Latin America were un- or underbanked. which means that they didn't either use a bank or they certainly didn't have a way to pay for goods on the internet. And so they developed Mercado Pago, which is kind of like PayPal or Venmo might be an analogy if you're unfamiliar.

Starting point is 00:07:45 They came up with a way to get on the digital bank or a digital payment system that was pretty simple. 2012 is kind of in the United States when we kind of hit a tipping point of over 50% of the population having a smartphone. It wasn't that different in Central America either, from my own experience. By 2012, I would say that a large percentage of people had a smartphone. And once you've got that, you've kind of got the thing that allows you to use a digital payment option really quickly. So Mercado Pago was paid just to grease the wheels of Mercado Libre's e-commerce site. It'd be like if there was an Amazon Pay way back when.

Starting point is 00:08:35 The funny thing about Mercado Libre is this Mercado Pago was originally formed just to grease the wheels of this e-commerce engine, right? But it's been so successful that I would argue over the last five, six, seven years, the e-commerce site is still incredibly important and incredibly valuable, and I would argue has the wider moat around it. But this payment option and the growth in the payment option, I mean, has really been the key to investor returns over the past seven years. It's used more now for paying for things off of MercadoLibre's website, like gas or groceries or things like that than it is for things on Mercado Libre's website. So it just goes to show how popular it

Starting point is 00:09:27 is. Yeah. And you can correct me if I'm wrong, but I think they have a hundred million total users across, uh, this is either e-commerce or Mercado Pago and maybe 60 million on one of the other ones. But either way, there are for a region that does have a lot of people. There are a ton of people in Mexico, Argentina and Brazil using these products. And one question we had, we asked people on Twitter if they wanted to have, you know, ask you any questions about this company and a couple that kind of combined some together that said, essentially, look, Amazon has invested heavily, especially into Mexico, a place where MercadoLibre has had much more success. Why do you think MercadoLibre's moat has been so durable, even with this huge investment from Amazon in the

Starting point is 00:10:18 region? And where do you see it vulnerable to Amazon or any other e-commerce competitors? Where do you think it's the financial stuff that you just talked about and how it reinforces together? Or is there something where they just knew this market better than their North American neighbor? Well, I think knowing the market better than their North American neighbor is a huge part of it. And I think that that does play a pretty big role. It is worth pointing out that I think if MercadoLibre were to be split up, and so their e-commerce was one thing, their MercadoPago was another thing, their logistics was a separate one, I'd be much more worried about what Amazon might do, what C-Limited, which is primarily in Southeast Asia, but is making inroads in Brazil.

Starting point is 00:11:08 I'd be much more worried about it. It is absolutely something to keep an eye on. But it's also worth pointing out, look, Mexico has been in this, sorry, Walmart has been in Mexico and many other Latin American countries under different brand names. Where I live in Costa Rica, it's called Maxi Pali. They own that. They've been there for a long time and MercadoLibre continues to take market share. I think it's how all the pieces fit together that's the most important.

Starting point is 00:11:41 So if it was just MercadoLibre and it was just a website that you could list things on and they didn't have delivery, I would be very worried about Amazon. I'd be terrified of Amazon. But that's not what it is. And they do have that last mile delivery and the payment option. And so it's something where if I was living there, my behavior as a consumer, I have all these reasons to continue using it. It's the website I'm used to going to. It's got the payment option that I use for everything else. I know about its fulfillment capabilities because these days, I believe more than half of their packages are delivered in one or two days.

Starting point is 00:12:26 And they've already made those investments. it's if amazon is making those investments to me like if they're making those investments in mexico that speaks more to how big the opportunity is in mexico than it does to them taking business away from mercado libre because the numbers just don't bear that out the the growth in mexico and e-commerce has been fantastic yeah and it seems like at least in those countries especially Mexico, MercadoLibre is farther ahead of Amazon. And as you mentioned, they have that fintech advantage that Amazon does not have. We have another question here on the e-commerce side of the business. What I noticed when reading through some of their investor relations materials

Starting point is 00:13:10 is they highlight constantly that Latin America e-commerce penetration is much lower than other parts of the world. I think they have it about half versus North America and maybe even less than half compared to east asia why is that and can i guess what uh not fixes that but what brings it to north america's level is it just riding like this general tailwind or can mercato libre kind of proactively do that by building out the delivering infrastructure where you know you don't have an existing ups that a lot of um companies in north america can ride on the back of let me let me, let me relate this to you with a story. Now, Mercado Libre's key markets are Brazil, Argentina, and Mexico. Those are the big three, but they're in Mercado Libre's e-commerce,

Starting point is 00:14:03 I think 14 different countries. So little story is this, my brother, he's not in it anymore, but my brother used to be in the Navy. He was a Naval officer and he was in the Navy when my wife and I moved to Costa Rica the first time. And as part of his background check for what he does, he had to have our, he had to send in all of his family's information to the Navy. And so he said, what's your address? I said, well, technically our address, and I'll translate this in English was, our address was the pink house, 150 meters from the beginning of the hill where this one church is that was our address it wasn't 42 such and such street it wasn't uh you know that that there are a number of latin american countries where that's how it is i

Starting point is 00:14:58 actually like it i know a lot of people hear that and they're like oh that's that's so backwards that's so antiquated or outdated i i love it um you know we just got back from costa rica and my daughter's 11 and her friends sent her a card and they had to ask for the address for it and again we we gave them it and they're like you have to be kidding me and it took they sent it the day that we left we were there for five weeks it arrived the day before we we came back to the united states it is just not how large portions of this area of the world they don't operate the same way that we do in North America, and they don't necessarily have the infrastructure, okay? So Brett and I were talking before we went on.

Starting point is 00:15:49 There's really only, in Costa Rica, for instance, there's really only one quote-unquote highway that has more than one lane, and the topography is a huge challenge. There are, there's an Amazon rainforest, there are volcanoes, there are mountains, There are switchback roads between all these things. And this might sound so boring and so like, well, why does that matter? We live in 2025. Well, it matters because when people order things on an e-commerce website, they need to be delivered somewhere.

Starting point is 00:16:23 And that means owning the last mile of delivery. And it's way harder than most people realize. But that's a great thing for MercadoLibre because they've already gotten started and are doing it, which means that if you want to challenge MercadoLibre, you're not only going to have to invest tens of billions of dollars in figuring this out, but you're going to have to do that and do it profitably while competing against the leader, which is kind of like, yeah, no, I'd rather not. I'd rather just poke my eyes out. That sounds more fun to me. Do you think that's part of why Amazon has struggled in some of those markets?

Starting point is 00:17:04 It's hard to say. I mean, Amazon's had so many things to focus on that I can see why this just isn't the top priority. You know, like, let's expand into these other regions. Let's focus on AWS. Let's focus on our own original content. And, you know, and then COVID comes along and they spend $4 billion just on COVID preparedness. You know, I think Amazon's a lot more focused right now on making their existing network more efficient than they are on expanding their network, especially because they're spending so much on AWS, which I think is the right decision. By the way, Amazon is my number one holding, the one stock I've owned for longer than MercadoLibre. So I'm not hating on Amazon here. Yeah, it does seem like there's plenty of opportunity left in North America, Canada, Western Europe, some of their existing markets for Amazon. And I want to come back to that market share number, because to me, it seems like, you know, around the world, yeah, there might be some sort of differences. But what people want to do is probably spend a good chunk, you know, maybe the 20, 30, 40 percent, maybe it'll be higher over the long term of their retail spending will be on in an e-commerce method if they if they had that opportunity, if they could get same day or next day delivery. Do you see that as a very easy opportunity and tailwind for MercadoLibre where, okay, well, just even if they don't gain market share, if e-commerce penetration in these countries goes from 13% to 30% over the next 10 to 20 years, that's an easy tailwind to revenue growth.

Starting point is 00:18:45 Is that how you see it or do you see it more as a headwind that it's not there yet? So I, the way that I think about it is kind of funny. I think that it's both. And here's what I mean by that. I think that there is this enormous opportunity if they hit 30, 40, 50% of all things purchased retail in a country are e-commerce. But I think that it's going to take longer to get there than we're used to it taking in North America.

Starting point is 00:19:15 And so I think a lot of investors have this expectation where they're like, well, why aren't we there yet? Well, why aren't we there yet? Why aren't we there yet? And I encourage you to buy a ticket and go visit these places and be like, oh. And again, this is not to say that they're underdeveloped. Different countries and different populations and different communities have different priorities. and, you know, blasting out the landscape to put a really great freeway in would be awesome

Starting point is 00:19:45 for e-commerce delivery. It might not be awesome, you know, for a country that doesn't want to do that. So in a weird way, in a very weird way, I kind of view MercadoLibre almost like I do Altria. Now that might sound like the weirdest analogy to make in the world. And for those that don't know, cigarettes. One of the things that made Altria such a great investment was this overhanging fear about lawsuits for a long time. Now, ironically, that actually made Altria ultimate stock to own over decades because they offered a dividend, right? And if you set up your dividend on an automatic reinvestment program called a DRIP, a dividend reinvestment program, and you were getting a 6% dividend and it was continually a depressed stock because people

Starting point is 00:20:50 were worried about these lawsuits coming to fruition, then you were getting, you were being able to buy more and more and more of this stock at pretty good prices when you were looking back on it 20 or 30 years later. And that's why Altria was such a great stock to own. Ironically, it was the fact that people were so bearish about this industry, it made it such a great stock to own because once it became clear that, yes, these lawsuits are real, but no, they won't ruin the company. Then the stock price normalized and it was like, wow, look at the returns here. MercadoLibre doesn't have a dividend anymore and it's not involved in cigarettes in any way, shape or form, but in much the same way, you know, we see the payment option taking off.

Starting point is 00:21:39 Now that's not surprising because like I said, huge portions, huge. I live in a rural area of people have smartphones and that's all you need to make digital payments. And so you can use that to send money between people. You can use that. A lot of people use that to pay their bills, like their phone bill, their internet bill, their water bill, their electrical bill, whatever it is. And so you've got a lot of payments happening there. You don't need to worry about the topography of a population or how a package gets delivered for the last mile, which is why Mercado Pago has been growing so fast. But if you're a long-term investor, don't sleep on the e-commerce, but know that it's going to take time. And by time, I mean decades.

Starting point is 00:22:24 I don't mean quarters or years. I mean decades. Okay. Let's talk a little bit more about that Mercado Pago and the fintech business overall. You've mentioned it as sort of greasing the wheels of e-commerce. Maybe that was sort of the genesis, but it's evolved over time. how do the fintech and the retail businesses work together? Maybe how do people use them aside from the retail business as well? And then do you think Mercado Pago gives Mercado Libre overall a competitive advantage against some of these other players? Yeah, I think it does. So ways that it can be used. I mean, again, they have mobile point of sale devices or point of sale devices, which are kind of like if you go to a farmer's market, you pay for something with your

Starting point is 00:23:17 credit card. You know, that vendor has something that they plug into their phone and then you tap your credit card. So MercadoLibre sells those to vendors throughout the countries where they're established. And that's a big deal. Again, while the physical infrastructure might not be there in a lot of Latin American countries, the internet absolutely is there in a lot of these countries. And so most people pay with credit cards in a lot of the places that I've been in Latin America. So you don't even have to be on MercadoLibre's website to be using this. I absolutely think that Mercado Pago reinforces that MercadoLibre e-commerce site because you're more likely to use MercadoLibre over, say, an Amazon or a C-Limited or if Walmart were to have like a

Starting point is 00:24:19 Jet.com moment, which was their e-commerce kind of catalyst in North America. I believe that you'd still be more likely to use MercadoLibre's marketplace because it's what you're familiar with and your payment option is integrated on there. But the other thing that I think is important is MercadoLibre, the marketplace really reinforces the moat around MercadoPago as well, because you're so used to getting, I don't know, an automatic delivery from MercadoLibre for something that it becomes habit forming to use MercadoPago. Because I don't know if we want to get into this yet, but I think the two biggest risks to MercadoLibre that I keep my eye on are one, a payment option being commoditized, which I think we saw that happen over the last 10 years.

Starting point is 00:25:13 If you just follow PayPal stock, or if you just follow Square, it can become commoditized. And so there has to be a special sauce that keeps people in there. Because if it doesn't, It becomes like airlines where it's just you choose the cheapest possible one because they're all interchangeable. Well, if only one of them is directly connected to the biggest e-commerce company in this section of the world, well, that's a key differentiator. And then the second is the company's credit business, which is, again, kind of like a genesis that's come from Mercado Pago. It's called Mercado Credito, where they offer loans like small, short-duration personal loans, loans to merchants. And then what's really been taking off is their credit card. That is both – it's a force multiplier is what it is.

Starting point is 00:26:08 It is really juicing returns. And as long as they're making good loans, that's great. But it is by far the biggest risk, too, because if they make mistakes in underwriting loans or if they get caught and there is some calamity that happens in that region of the world that causes them to all of a sudden have a whole bunch of people defaulting on their loans, which that's one of the reasons it's great that these are mostly short duration loans. They're not, you know, 30 year mortgages or anything. Then that risk is contained. But to me, that is always one of the first things I go and check is I check the loans that are beyond 90 days past due and making sure that that's not ticking up. And then I also watch this metric called NEMAL, which is the net interest margin after losses. Usually it's been over 30%, even 35%. It's come down to about 28%. And you might think that that's alarming.

Starting point is 00:27:16 And without any context, that is alarming. But the main reason for that is because their credit card business is growing so fast. I don't know about you guys. I hope, you know, hosting a podcast about finance issues, you pay your credit card bill off at the end of every month. And what's the interest rate you pay on that? Zero, right? As long as you pay it off in full, it's zero.

Starting point is 00:27:37 Well, a lot of people using a MercadoLibre credit card or MercadoPago credit card are paying them off right away, which means that they're going to get less interest, right? Because people are paying them off. That's great. but that will cause that Nemal to fall in a way that is not alarming. In fact, we are in this community ourselves and enjoy just how much value we get by collaborating with other investors. If you're interested in joining, head on over to bluechippersclub.com and hit apply.

Starting point is 00:28:34 Right now, it is completely free to join. The link is in the description. Yeah, let's dive more into this credit portfolio. We had a lot of questions on this on Twitter as well. It's something that I think analysts have been, I don't know if concerned is the right word, but they just want to know what's going on because it's growing so quickly. If I take a look and I pulled up while you were talking at our friends at FinChat, I should mention, use our link, finchat.io slash chitchat, get 15% off any paid plan.

Starting point is 00:29:04 One of their KPIs they have that they update each quarter is credit revenue. And I'm seeing a growth from December 2020, about $246 million in revenue. and it's grown at a 96 annual rate to 3.6 billion dollars in 2024 what is you talked a little bit about it but what is the strategy here and is this how they take again you mentioned the worries about commodification or commoditization is this how they become a full-fledged bank for their members and yeah just take it take it anywhere you want because seeing just rapid growth here and it's becoming a larger part of the business and i think listeners would you know it would be helpful to get a full understanding of it well let's just think about it from the perspective

Starting point is 00:29:56 of a merchant right so in real life uh when my family and i come back from costa rica we've stopped doing this but we used to bring a whole bunch of coffee from the coffee farm that we live on and we would sell it at a local farmer's market now we didn't do this to make money and And we did all right, but we didn't make a ton. And we thought it'd be really educational for our daughter. But let's just assume this was our full-time business, right? And we needed a mobile point-of-sale device in order for people to be able to pay. And so we, say, got the Mercado Pago, you know, the little insert like Square has had.

Starting point is 00:30:37 or we just put our handle out there like Venmo has. So we're already in there, right? We're in the ecosystem because hypothetically here, we're using Mercado Pago so that people can buy their coffee and pay for it without having physical cash. Well, all right. So next, we want to expand. And so when we want to expand, my wife and I are thinking,

Starting point is 00:31:03 well, we go to one farmer's market a week. if we go to three, that'd be great. But if we go to three, well, then we've got to buy two more tents. We've got to pay for people to be there. We've got to buy more coffee roasters. We've got to bring back more coffee. And look, we'll be able to pay all this off after a year, but let's just say we don't have the money to buy all those things right now. So we could seek out another bank and get a loan from that bank in order to expand our coffee business. Or Mercado Pago already has all of our information. We've filled out most of the paperwork. They know how our sales are doing. We can just go to Mercado Pago and say, hey, can we get a loan to buy all this

Starting point is 00:31:49 stuff and we're going to pay it back within three months because, you know, three months of sales of our coffee, we'll be able to pay it off. It makes more sense for me to use them than to go to someone else because I want to spend as little time as possible worrying about financing and most of my time on making sure I do a good job in rolling out these new locations. So the way they're in with their credit portfolio was start with the merchants And that's what they've done. And now they're moving on to the consumers. So before they were talking to me and my wife, the people that were selling the coffee, now they're really focusing on their credit card business.

Starting point is 00:32:31 So now they're focusing on our customers. So they're just saying, well, you know, people go to Brian and Allie's coffee stand and they use a Mercado Pago mobile point of sale system to pay for their coffee. Why not have them pay for it with a Mercado Libre credit card? I mean, tap that credit card on a Mercado Pago point of sale system, and now everybody's in the ecosystem. So that's how you roll it out. And that is another advantage because nobody else in Latin America has that relationship that's that wide over that long of a time frame with both sides, with the merchants and with the consumers. Yeah, I can see. You called it out as one of your biggest risks.

Starting point is 00:33:17 also sort of opportunity and a risk i could see how you characterize it as that just because it can look good until it doesn't right exactly you don't know what those loans are you know you're not the one originating these loans except for maybe the uh you might be you might have a good sense of how the one with your coffee stand would be doing but yeah for the most part the uh the loans can look really good and growth can be exciting, but obviously growth at a lender could be risky as well. I want to double down on the Pago side of things. There's been a lot of conversation made about competition with NewBank. New Holdings is the overall parent company, but NewBank, I believe, is the brand in South America. What do you think of this

Starting point is 00:34:08 competition and then i have a follow-up which is would you be more concerned about an eroding moat in the e-commerce side of things or an eroding moat on the fintech side of things so i so first new bank um to put all my cards on the table i have not spent as much time as i probably should have on new bank it actually is on my list of of stocks to really dive into and And in my own community, I'm actually doing that starting next week. But I can say this, if Nubank is a serious threat, that has not shown up in the numbers yet at all in terms of Mercado Pago's growth, which doesn't mean that Nubank is uninvestable. I don't mean that at all.

Starting point is 00:34:59 What it means is there's probably going to be more than one winner in this region, which isn't surprising, right? Like we've got MasterCard, we've got Visa, we've got Discover, we've got American Express, different levels of success across those four, but there's certainly room for all four of those. So I am more worried about the moat degrading on the Pago side because I think it's more likely, I'm less worried about the moat degrading on the MercadoLibre marketplace side because I think it's less likely, because I think it's harder to build that moat, because it's not about getting a phone in everyone's hand. It's about buying a thousand delivery vans and hiring thousands of people and building fulfillment

Starting point is 00:35:52 centers and maritime shipping and weather and mudslides mudslides are a huge deal in a lot of these countries like a fintech doesn't have to worry about that but that's what makes the moat so why that why would anyone want to deal with that if the e-commerce moat started to degrade that would be hugely alarming to me but if you look at if you look at the take rates that the e-commerce side has had i mean this is another one i think that is up on finchat i'll i'll try and pull it up right now they what they do is they measure the take rate which is basically just like out of all the goods that are bought and sold on mercado libre's marketplace what percentage of that just becomes revenue for MercadoLibre because obviously, you know, it's not going to be huge.

Starting point is 00:36:48 And if I'm looking right here and I look at their take rate in commerce, here we go. We've got it pulled up. It was 10%, 10% right before the pandemic. And it's almost 25% now. I mean, very good. Merchants aren't going to do that unless you're the only one who can do the thing that you're offering to do who would you say the biggest competitor is in e-commerce or just to the e-commerce business is it c limited amazon because the way i i'm not an expert on this market uh this e-commerce market i'm not an expert on mercato libre but it seems to me like there is a long it's there's not really much of a competition to their direct business like people can have an e-commerce website but no one is close to replicating their full offering now i could be

Starting point is 00:37:44 wrong we could check in in two years and i'm this might be the dumbest response ever but i actually think that the sleeping giant is walmart because walmart does have brands that is acquired there and should they get the itch to expand it's an option we've seen how walmart all of their locations were an asset in the 70s, 80s, and 90s, early 2000s. And then they immediately became liabilities once Amazon came on because it was just like, oh, you have to pay for all those retail locations. They're not just delivery. And then when they got Jet.com, all of those physical locations went back to being an asset because they became, and now we see Target does it, Walmart does it, all these different places do it.

Starting point is 00:38:31 They're pickup locations, right? So it's not exactly the same as what MercadoLibre and Amazon do, but it's convenient. It's nice. I can just drop by, pick up my stuff, they'll come out, they'll deliver it. I think that's the sleeping giant, actually. Yeah, interesting point. And especially in Mexico, Walmart is quite popular. And as you mentioned, some of these other countries, they have different brands under the same umbrella. One of the frameworks you use while investing is the concept of anti-fragility or being an anti-fragile business. Feel free to talk about just the concept in general. But MercadoLibre, it's been holding for years of a long time. Taking away from this conversation, you continue to think or you plan on holding it for a long time after this as well. What makes them anti-fragile and why is this business so durable? Finchat.io is the complete stock research terminal for fundamental investors. They have robust financial data on more than 100,000 stocks globally. That includes more than 10 years of income statements, balance sheet, cash flow, and

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Starting point is 00:40:09 No card required. Again, that's FinChat.io slash chitchat. The link will be in the show notes. at public.com slash chitchatstocks and get up to $10,000 when you transfer your old portfolio. That's public.com slash chitchatstocks, paid for by Public Investing. Full disclosures in the podcast description. So yeah, so I guess maybe just to define it in case people don't know, it was a term that was coined by Nassim Taleb, who is a trader, a former trader. He's an academic. He's a professor of risk.

Starting point is 00:41:11 He also has quite the Twitter following. I think he's got over a million followers. And he's written The Black Swan, Skin in the Game, and a book called Anti-Fragile, in which he says that most people divide the world into two categories, things that are fragile and that they break easily when exposed to chaos, and things that are robust, which don't break when they're exposed to chaos. And he said, we're missing a really important third category, which is the antifragile, things that when they're exposed to the right kind of chaos, the right kind of stressor, they actually don't break, but they also don't stay the same. They actually get stronger.

Starting point is 00:41:53 The easiest kind of proxy for this is our immune system or our muscles, right? When you go and lift weights, you are introducing chaos. And as long as you don't overdo it, you know, if you go and try and bench a thousand pounds tomorrow, like, you know, you guys look fit, but I don't think any of the three of us could pull that off. And I think we'd get in trouble if we did try to, as long as you introduce the right kind of chaos, you'll actually get stronger. And the beauty of looking for companies that are anti-fragile is I can stop trying to predict what's going to happen.

Starting point is 00:42:34 What do I mean by that? I mean, I don't care. I just know that if there's some type of chaos that comes in and wipes out an anti-fragile company, that probably means it's wiping out everything. In which case, well, screw it. Investing isn't just going to work for me, right? Like aliens land and destroy everything. I'm not going to care about how anti-fragile my company is if that happens. But if a company has shown the characteristics of anti-fragility, then I think that it's

Starting point is 00:43:04 like having your thumb on the scale, like it tilts things ever so slightly in your advantage and over, I've held MercadoLibre for 12 years now, over 12 years, that can be a big deal. So what that means is you have to have your defense and your defense is a wide moat. And I think with MercadoLibre writ large, you've got network effects for the e-commerce side, right? So there's a moat there. You've got switching costs with MercadoPago. It's not like you can't switch. It's just that people don't switch.

Starting point is 00:43:37 You've got low-cost production. And what I mean by that is nobody else in Latin America can deliver a package, can go from click on a computer screen, package arrives two days later. Nobody can do that for a lower internal cost than MercadoLibre right now. They've got brand value. And so they've got all these moats. But then they also have the offense, which is optionality. Look, they started out and it wasn't even Amazon. When they started out, it was eBay.

Starting point is 00:44:07 And then it became eBay slash Amazon. And then it became eBay slash Amazon slash PayPal. And believe it or not, even today, it's eBay slash Amazon slash PayPal slash Shopify, because you can set up digital e-commerce storefronts with this as well. And so that combination, plus financially speaking, they've got more cash than debt. They're free cash flow positive. And they have a management team that's bought in. They're founder led. They own, Marco Scalperin owns about 8% of the company, which is not a small thing when

Starting point is 00:44:46 you're a hundred million dollar, billion dollar company. That, that is what makes it. And then, you know, I used to only focus on anti-fragile companies, which worked incredibly well for me from 20, I started doing this in about 2015. So from 2015 to 2022, it was great. But then I don't know about you guys, how 2022 treated you, but my portfolio fell over 50%. And that's because I forgot or needed to learn to focus on the anti-fragility of a stock. And a stock and a company are not the same thing.

Starting point is 00:45:28 If it's a Venn diagram, there's a lot of overlap, but they don't overlap perfectly. And so that's where valuation came in. And even with MercadoLibre, their free cash flow is somewhat artificially high. And I only say that because they set aside a ton of money for credit losses for the same reason that we were just talking about. Because if their credit portfolio goes south, they've got to have a lot set aside for that. But if you guys had to guess without looking, company growing their top line by over 20%. I think it grew by over 30%. Earnings are growing even faster.

Starting point is 00:46:11 What do you think their price to free cash flow is today? I'm trying to think of the context from all the stuff we talked about. What I would say is something of a fair price, maybe 30 to 40, 30 to 50 times range would be something that I would guess. where I would trade at? Because you're asking the question, I'm going to assume it's a little lower. Also, like you said, the free cash flow, including the credit coverage, I would assume it comes down a little bit. I'll go maybe 25. 14. Trades for 14 times free cash flow. Now, again, all that being said, the coverage for those credit losses is not insignificant, But at the same time, it's about 20% of the company's, 25% of the company's free cash flow comes from that.

Starting point is 00:47:08 But still, I mean, even so, it's probably a normal, if they didn't have to do that, it's probably still trading for, I don't know, around 20 times free cash flow then. To me, that's an anti-fragile stock too, where they just have to not screw everything up. Well, it sounds like we're wrapping things up here, and it sounds like there are lots of levers for MercadoLibre to pull for things to go right. It also feels like they have a lot of wind at their back, so to speak, and momentum within both Pago, e-commerce, and even Credito as well. But we do like to ask the pre-mortem. MercadoLibre has grown its earnings per share from $2.40 in 2015 to $37.70 in 2024, which is a phenomenal growth rate. Why would earnings per share be lower five years from today? I think that earnings per share could be lower five years from today for a couple of reasons, some of them good, some of them not so good.

Starting point is 00:48:18 I'll give you the good reason first. The good reason is that they've hit on another Mercado Pago-like revenue stream and they're reinvesting in it like crazy. That'd be great, right? Like that's the story of Amazon over the last 30 years. Their PE ratio is usually through the roof and a lot of people are like, oh, it's too expensive. They don't realize, well, that's just because they're reinvesting everything in something else like AWS. So that would be a good reason. If we're looking at a bad reason, it would be that the credit losses were significantly more than people were expecting.

Starting point is 00:48:55 Another reason could be that, you know, I'm assuming that the combination of e-commerce, delivery, payment makes it so that Mercado Pago is sticky. Let's just say that it's not for whatever reason. Well, then that could be a problem. And then I'll also say the dark horse is, you know, it's funny because in Argentina right now, we're actually seeing the opposite of kind of a president who is taking a very libertarian approach. But if certain governments decided that they were going to start taxing companies at an exorbitant rate, I mean, once you set up a delivery network in a country, it's not easy to pivot to a different country. You can't pick up a fulfillment center and drop it somewhere else. You can do that with your credit business, right? You can unwind it and then just focus on Mexico if that's the place or focus here or focus there.

Starting point is 00:49:58 You can't do that with e-commerce. So that would be the other thing. But I will say that geopolitical threats have existed for the entire time MercadoLibre has been in business. In fact, when I first invested, Mexico was not – they've always had a big three, right? Now it's Brazil, Argentina, Mexico. Do you guys know what the third one was when I first invested in it? I'm going to guess Colombia. Venezuela.

Starting point is 00:50:28 Which now is just like – Economic collapse, yeah. Yeah. And Mercado Libre is still here and it's still doing well. But, I mean, that is – that's not something you can ignore either. Like there is always a possibility that a government could do something. And because you can't pivot out of a country where you have fulfillment, that's something you got to be aware of. But I also think that's why the stock trades for such a reasonable valuation.

Starting point is 00:50:58 Yeah, versus its growth perspective. And compared to probably any other e-commerce player out there, any other retail player, they have that muscle memory or just the skills built up to weather any of these economic headwinds. Because what I find fascinating with the business is that despite Argentina going through hyperinflation, they've been profitable. It seems like they haven't really missed a beat in that country. And if that country starts taking – recovers economically, I feel like they'll actually have some tailwinds in that country and that could do – could be quite promising. Absolutely. All right. Well, Ryan, I think that's it.

Starting point is 00:51:38 Do you have any more questions for Brian before we sign off? No, I think that was pretty comprehensive. That is going to do it. So thank you, everyone, for tuning in. Thank you, Brian, for your inaugural episode on the show or your first appearance. I do want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss on this podcast is not formal advice or recommendation. Ourselves or guests may buy, sell, or hold any of the stocks mentioned on these episodes.

Starting point is 00:52:07 Thank you again for tuning in, and we'll see you all next time. Bye.

Chit Chat Stocks - The Magic of MercadoLibre With Brian Stoffel (Ticker: MELI)

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