Motley Fool Hidden Gems Investing - Two Growth Stocks Hit a Snag

Episode Date: November 7, 2024

Equity analysts in Manhattan have a difficult time imagining the logistics needs in Brazil. (00:21) Bill Mann and Ricky Mulvey discuss: - Earnings from MercadoLibre and Celsius. - The difficult market for energy drink makers. - Schwab opening up 24 hour trading for stocks. Companies discussed: MELI, CELH, MNST, SCHW Get a two week free trial of 1Password at www.1password.com/MOTLEYFOOL Host: Ricky Mulvey Guest: Bill Mann Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

How about a little bit of trading all of the time? You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Bill Mann. Bill, it's good to see you today. Hey, Ricky. How you doing, man? I'm doing all right. So we're recording this quick note for listeners. This is before the Federal Reserve has announced what they are doing about interest rates. In fact, we're recording it one hour before. I know this is something you're going to be following very closely and deciding what to do with all of your stocks once Jerome Powell says something, but I just wanted to let listeners know we're going to dive into some company earnings.

First up, we've got two growth stocks that have hit a little bit of a snag. Let's start with a full favorite, and that's MercadoLibre, the online marketplace and payments company. First part sounds really good, Bill. Revenue up 35% year on year. It's already the largest company in Latin America, I believe. Almost 7 million new buyers came onto the platform, say it two times, CEO Marcos Eduardo Galperin. This is a number higher than the number we saw during the peak of the pandemic. So let me be clear on that. Not even during the explosion of demand that we experienced in the pandemic, we saw a number of new users at this level. Bill, let's focus on the positive first. What's driving the business growth for MercadoLibre?

So, Ricky, MercadoLibre actually told us about a lot of this a month ago, and they reported that the consumer spending in Argentina has begun a really substantial rebound with consumers spending about $916 million in the month. So there's a lot of momentum in non-essential goods like computers and cell phones. So they've been talking about the growth rates for a while. So, you're right, MercadoLibre, I guess until today, was Latin America's most valuable company. It probably, as we go to press, they're down 15%, so they may not be by the end of today. But they've managed to do this despite really long-term weakness in one of the most key markets that they have. So, you can imagine what they might be able to do with a tailwind. So it's all sorts of good news on the top line from MercadoLibre.

Let's talk about what the traders, some investors, are a little upset about. And that is the growth of its credit book. And that was by 77%. We talked about the online marketplace where you can buy a lot of those Amazon-related items. Also cars, which you can't get on Amazon. I think that's kind of interesting. You can get a car on MercadoLibre.

Anyway, I should bring it back to the credit book of MercadoLibre. The number of credit cards, loans, that grew by 172%. For those keeping notes at home, almost 200%. We'll leave it there. A lot of growth in credit cards. And this impacts the company's bottom line. So before we get to the reaction, first, the fundamental question, how is this credit card issuance, how does that affect a company's earnings and net income? Well, we have to keep in mind that Latin America, by and large, is a much more cash-driven economy. It's changed to somewhat, thanks in no small part to MercadoLibre. But it seems like the market got spooked in MercadoLibre's case due to margin erosion,

which the operating margins dropped from 18% down to about 10%, which would be really, really meaningful if a company's business mix was exactly the same as it was a year ago. But when you talk about credit cards, they are facilitating instruments, but they are a relatively low-margin business. So the fact that MercadoLibre's credit division grew at, what did you say, almost 200%? Yeah. You gave them some credit? Yeah, 172%. It means that, of course, it's going to put a lot of pressure, downward pressure on margins.

So they've also had to increase loan loss provisions. They've also increased the quality of the customers that they're going after, which means they're going after customers who are less profitable but offer lower credit risk. So this is a part of doing business in a country for a company that is operating in countries where the faster way of facilitating commerce will only help them. So let's talk about that long-term vision. So we have the marketplace side, and then you have Mercado Pago, which we talked about the results of. There's the short-term pressure, but long-term, what is Mercado Libre trying to accomplish with Mercado Pago? Yeah, so Mercado Pago has been around for them as a transaction facilitation function. I'm going to try and say that quickly three times, transaction facilitation function, since 2003.

So things have changed really rapidly in Latin America, although it is still much more cash-based market than the ones that you find in North America. So a lot of Latin American companies lack a clearinghouse that tells merchants whether an individual is a good credit risk or not. So Mercado Pago's core purpose has grown to keep more of the value and chain components within the Mercado Libre universe. And that gives them the ability to make their own credit assumptions and judgments on the credit worthiness of the clients. There's also some margin pressure as MercadoLibre opened up a lot of distribution centers. And Bill, I did find some joy reading the earnings transcript where you see these analysts in New York being like, what is the immediate cash that's coming from this new Brazilian distribution center? And the poor leadership, I shouldn't say poor leadership, the polite leadership of Mercado Libre saying like, well, you know, we need to like sell things to people in Latin America,

and I'm sorry, you got to update your model. That's right. Hey, Manhattan, let me tell you how things work in Brazil. Have you been to Brazil? Have you been to the parts of Brazil in which these logistics facilities are being built? These are things that are tremendously capital intensive when they are built, and they don't pay off right away. I mean, And the logistics network for MercadoLibre has to onboard these new facilities. And so this is a company that has had a long-term view for a couple of decades now, and I don't see that it is changing simply because the market didn't seem to like what it liked in one quarter. So nothing's wrong. I shouldn't say nothing's wrong.

I want to position this as a question, Bill. Is anything wrong with the business? Is something wrong with the business or are we just seeing Wall Street analysts in real time having to change the numbers on their Excel cash flow models or maybe a little bit of both? Sometimes the truth is complex. I think that's kind of it. I mean, you've got to keep in mind that MercadoLibre stocks risen about 75% over the last year. So, you know, the market is looking at a normal course correction of business and, you know, they're correcting a little bit. But I don't think that anybody who has held MercadoLibre stock for any period of time

should be anything but delighted at what they saw. Anything else on the quarter you want to hit before we move on? Clapped his hands and said, no, that's fine. That's an acceptable answer. I feel like we stuck the landing on this one. Well, now we're not because we're delaying too long. Anyway, we'll be right back after this. All right, now I want to look at a growth stock that is looking less growthy.

We talked about, you know, analysts being upset, even though there was a lot of revenue growth over at MercadoLibre. Man, Celsius, which sells energy drinks, they say the energy drink is healthy. Celsius announced that sales were down 31% year-on-year. Bill, this is one that I own some shares on. I'm a little disappointed. Why is it so difficult to sell stimulants these days? Ultimately, it isn't. But in order to talk about Celsius, I feel like we've got to talk about accounting just a little bit, which is like the opposite of stimulants.

But Celsius recognizes its revenues when their product goes to the distributor. So when you see something like a 31% decrease in sales, what that's not telling you is that end demand is down. It's not really relevant to end demand at all. Rather, what you're seeing with Celsius is that its primary distributor, who's Pepsi, has said no mas because they are sitting on a ton of inventory. So when we hear in the call a lot of inventory optimization, that just means Pepsi ordered too much, they're working through the inventory, and now we're selling a little less to our largest customer. Yeah. And what this should tell you is that the past quarters that you've seen three months ago and six months ago were probably not as great as they were advertised at the time, simply because of that revenue recognition policy. So if you look at the trends for Celsius, things are a little mixed. One highlight is that international revenue grew 37% year on year. Now I'm a little tamped down about how exciting these

numbers might be because of the past inventory problems. But also, Celsius market share was basically stable in the United States. Bill, anytime you start hearing a CEO highlight, quote, 10 basis point growth, you might want to raise your eyebrows because 10 sounds like a lot, But then you realize it's a basis point, and that's just 0.1%. It's on the wrong side of the dot, isn't it? The wrong side indeed. I'm trying to find the compelling growth story here because I'm wondering if my expectations need to change as a long-term investor.

But is the international revenue, is that a compelling enough growth story for you here? You know, I don't really think so. I mean, I think we've got to keep in mind that Celsius, even after the 70% drop in its share price from its peak within this year is up, it's a 23 bagger in the last five years. So, you know, maybe it's not the next monster beverage, but I mean, it's been pretty darn good. But they are now running up against the fact that foot traffic into convenience stores is down. And that may have to do with gas prices. It may have to do with overall food prices. There are all sorts of reasons why consumers might trade down and become a little more value conscious. And as we know, convenience stores are not where you go to find value. let's um let's talk about the price tag of this stock with with the value hunter himself

so celsius now is it 30 times earnings and 30 times free cash flow that's above your your average market multiple but this is verse being at 120 times earnings 4x that 240x free cash flow That was just back in January, less than one year ago. And Celsius still, it's selling more drinks on Amazon. It's selling more drinks at Costco. Still figuring some things out with other value clubs. It's launching more flavors. Hey, how about that?

New flavors. Are we entering value territory, this thing? The valuation is getting very similar to what a more mature company, a.k.a. Monster Energy Drink, is now. Yeah, I want to be careful with this because I think that we need to tip our hats to Celsius for the job that they have done over the last decade growing in an incredibly competitive market. So when you mention Monster and the other giant in this space is Red Bull, when they came into this market, they essentially created the market. But that's not really possible for a company like Celsius. They have to come in and specifically take market share.

I wonder what the cultural breadth behind Celsius is. I mean, Red Bull at this point has gone huge into sports and Monster has gaming. What is the big cultural pull for Celsius that's going to drive market share gains for them? I mean, I'd say that the biggest thing that they have now is that they're the official energy drink of inter-Miami. Is that enough to drive market share gains? What are some of the new flavors? It's Kiwi Guava. Is that it?

I mean, it's the promise that it's going to be healthier for you than a Red Bull or a Monster Energy drink. They have more like sort of like fitness type influencers saying, hey, I'm drinking Celsius and you should too. I don't know. Maybe it's enough. Maybe not. I certainly hope it is. But I think a lot of investors have looked at this stock, and I've had this in the back of my head, Bill. I'm guilty of it. You think, what if this thing's the next Monster Energy? Monster Energy, for those who don't know, that was the best returning stock since the year 2000. Not just for Celsius, but when investors are hoping that something is the next monster, the next Chipotle, what's your advice for them when they're trying to go on that storyline? Usually, if you want to take that shot, you should probably own the company that you're comparing it against as well because i look it has to be said that celsius has done an absolutely

incredible job of getting itself into the conversation uh as a leading brand in this highly competitive market uh but across the board you're seeing you're seeing a slowing of sales in uh in energy drinks and would you want to make the bet at this point in a mature market that the winner is going to continue to win or that the upstart is going to really keep taking market share in a Lord of the Flies market? Because that's what you're looking at if energy drinks do not go back to being on a growth trajectory across the board. I'm a little more optimistic that they can take some market share, but I hear what you're saying. I'm seeing more people drink Celsius in my Lynchian observations. When I went to go lease

a car a few weeks ago the guy who was giving me the the leasing offer he had his vape and he had a celsius energy drink and i'm like there we go we're making share gains right here you're making healthy choices pal what i'm sorry was uh lord of the flies reference was that not positive enough for you i could try again lord of the flies reference you can make whatever reference you want i think we're talking about energy drinks not people who have been trapped on an island and then fighting to the death with other school children but but i'm glad to see where your head's that right now. Last week, I'm doing a new story. I think we stuck the landing on that. Last week, Charles Schwab announced that it would significantly expand 24-hour trading. This

is something I wanted to explore with you because you like a weird market mechanics type story, Bill, announcing that, quote, select Schwab clients will be able to trade all S&P 500 and NASDAQ 100 stocks, as well as hundreds of exchange-traded funds anytime Monday through Friday. The firm is going to gradually extend this capability to everybody in 2025. Schwab is very popular, especially with all the TD Ameritrade folks on board. But why are they doing this? Why are the normal market hours not good enough for us retail investors? Well, you've heard about money, right? I have heard of money. Yeah, Schwab would like to have more of it. So this is a way what they what they've said. And I think that this is probably right. They really want a lot more

of the international market. And the 930-4 market limits their capacity to be able to trade. So what Schwab is planning on doing essentially is matching trades with each other within its own universe of shareholders. And with $9 trillion in assets under management, they definitely will have the capacity where they are able to make a market matching buyers and sellers within their own customer base. So this is a play for them to expand their market attractiveness to a generation of people who are used to being able to do things anywhere at any time. They also may be following the lead of Robinhood here. Robinhood has 24-hour trading on a lot of stuff. And as we've seen when these upstart brokerages, for example, offer commission-free

trading, then you see a lot of the more legacy brokerage-type companies get in line and realize that they have to compete, especially to get the younger audience. With this opening up, 24-hour trading for stocks, does that have any impact, do you think, on the long-term investors, the buy-and-hold folks that are listening to this show? Maybe. I mean, there are studies out there that show that almost all of the movement of the companies within the S&P 500 is actually happening between the time when markets close and when markets open up. Anytime you have a market in which there are fewer participants, you could see more inefficiency. And when you see inefficiency, you can see bargains pop up or you can see opportunities to sell deer pop up. But as for

me. Maybe I'm a fuddy-duddy, but it's not something that's super relevant to me. But if I were at a period of time in which I were active in the markets looking to buy or sell shares, I would love to be in an environment in which I am competing against fewer people to find price discovery. A fuddy-duddy? Has anyone ever called you a fuddy-duddy before? Or is this an insult you made up for yourself? Maybe I'm just claiming it at this point. I'm getting out ahead because the youngs apparently want this. I think it's a good point, too. You're also when you're looking at these companies that are going to be in the 24 hour markets, you're not I imagine you're not thinking about the mag seven big tech companies. You like to play in the

smaller cap realm, which does exist between what would it be? Probably the numbers 470 and 516 or whatever makes up the the Big Ten conference. That is the standard and pours 500. Yeah, that's right. what is the difference then between this type of stock trading and you mentioned the big moves after hours when you see a when you see a company report earnings at 4 30 and then the stock makes a big move what's the difference between the trading that's going on there and the trading that's being opened up to more retail investors here i mean they're actually i mean obviously there's a huge amount of of after hours and before market trading that's available now generally speaking what you're seeing when when the price change isn't so much driven by trading

it's driven by the new information and so you see gaps in between the four o'clock close price and the uh the the 9 30 open price and you will see with company after company that the whatever moves happen after market and before market tend to not be fully efficient. Usually what you have is a gap up or a gap down that accounts for the majority of those moves. It was like what we were talking about earlier with MercadoLibre. There was a big move and then we're looking in the middle of the day to say, oh, where did that sort of result settle? Anyway, Bill Mann, appreciate your time and your insight. Thanks for being here. Hey, thanks, Ricky. As always, people on the program may have interests in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.